THIRD DIVISION MEDICARD filed its First, Second, and Third Quarterly VAT Returns

through Electronic Filing and Payment System (EFPS) on April 20,

April 5, 2017 2006, July 25, 2006 and October 20, 2006, respectively, and its
Fourth Quarterly VAT Return on January 25, 2007. 8

G.R. No. 222743

Upon finding some discrepancies between MEDICARD's Income Tax
Returns (ITR) and VAT Returns, the CIR informed MEDICARD and
MEDICARD PHILIPPINES, INC., Petitioner,
issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
September 20, 2007. Subsequently, the CIR also issued a
Preliminary Assessment Notice (PAN) against MEDICARD for
DECISION
deficiency VAT. A Memorandum dated December 10, 2007 was
likewise issued recommending the issuance of a Formal Assessment
REYES,, J.: Notice (FAN) against MEDICARD.  On. January 4, 2008, MEDICARD
9

received CIR's FAN dated December' 10, 2007 for alleged deficiency
This appeal by Petition for Review  seeks to reverse and set aside
1
VAT for taxable year 2006 in the total amount of Pl 96,614,476.69,10
the Decision  dated September 2, 2015 and Resolution  dated
2 3
inclusive of penalties. 
11

January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA
EB No. 1224, affirming with modification the Decision  dated June 5,
4
According to the CIR, the taxable base of HMOs for VAT purposes is
2014 and the Resolution  dated September 15, 2014.in CTA Case
5
its gross receipts without any deduction under Section 4.108.3(k) of
No. 7948 of the CTA Third Division, ordering petitioner Medicard Revenue Regulation (RR) No. 16-2005. Citing Commissioner of
Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc.,   the CIR
12

Internal Revenue (CIR) the deficiency argued that since MEDICARD. does not actually provide medical
and/or hospital services, but merely arranges for the same, its
Value-Added Tax. (VAT) assessment in the aggregate amount of services are not VAT exempt. 13

₱220,234,609.48, plus 20% interest per annum starting January 25,

2007, until fully paid, pursuant to Section 249(c)  of the National
6
MEDICARD argued that: (1) the services it render is not limited
Internal Revenue Code (NIRC) of 1997. merely to arranging for the provision of medical and/or hospital
services by hospitals and/or clinics but include actual and direct
The Facts rendition of medical and laboratory services; in fact, its 2006 audited
balance sheet shows that it owns x-ray and laboratory facilities which
MEDICARD is a Health Maintenance Organization (HMO) that it used in providing medical and laboratory services to its members;
provides prepaid health and medical insurance coverage to its (2) out of the ₱l .9 Billion membership fees, ₱319 Million was
clients. Individuals enrolled in its health care programs pay an annual received from clients that are registered with the Philippine Export
membership fee and are entitled to various preventive, diagnostic Zone Authority (PEZA) and/or Bureau of Investments; (3) the
and curative medical services provided by duly licensed physicians, processing fees amounting to ₱l 1.5 Million should be excluded from
specialists and other professional technical staff participating in the gross receipts because P5.6 Million of which represent advances for
group practice health delivery system at a hospital or clinic owned, professional fees due from clients which were paid by MEDICARD
operated or accredited by it. 7 while the remainder was already previously subjected to VAT; (4) the
professional fees in the amount of Pl 1 Million should also be MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR]
excluded because it represents the amount of medical services the amount of P223,l 73,208.35, inclusive of the twenty-five percent
actually and directly rendered by MEDICARD and/or its subsidiary (25%) surcharge imposed under -Section 248(A)(3) of the NIRC of
company; and (5) even assuming that it is liable to pay for the VAT, 1997, as amended, computed as follows:
the 12% VAT rate should not be applied on the entire amount but
only for the period when the 12% VAT rate was already in
effect, i.e.,  on February 1, 2006. It should not also be held liable for Basic Deficiency VAT ₱l78,538,566.68
surcharge and deficiency interest because it did not pass on the VAT
Add: 25% Surcharge 44,634,641.67
to its members. 14

Total ₱223.173.208.35
On February 14, 2008, the CIR issued a Tax Verification Notice
authorizing Revenue Officer Romualdo Plocios to verify the
supporting documents of MEDICARD's Protest. MEDICARD also
submitted additional supporting documentary evidence in aid of its In addition, [MEDICARD] is ordered to pay:
Protest thru a letter dated March 18, 2008. 15

a. Deficiency interest at the rate of twenty percent (20%) per

On June 19, 2009, MEDICARD received CIR's Final Decision on annum on the basis deficiency VAT of Pl 78,538,566.68
Disputed Assessment dated May 15, 2009, denying MEDICARD's computed from January 25, 2007 until full payment thereof
protest, to wit: pursuant to Section 249(B) of the NIRC of 1997, as
amended; and
IN VIEW HEREOF, we deny your letter protest and hereby
reiterate in toto assessment of deficiency [VAT] in total sum of b. Delinquency interest at the rate of twenty percent
₱196,614,476.99. It is requested that you pay said deficiency taxes (20%) per annum on the total amount of ₱223,173,208.35
immediately. Should payment be made later, adjustment has to be representing basic deficiency VAT of ₱l78,538,566.68 and·
made to impose interest until date of payment. This is olir final 25% surcharge of ₱44,634,64 l .67 and on the 20%
decision. If you disagree, you may take an appeal to the [CTA] within deficiency interest which have accrued as afore-stated in (a),
the period provided by law, otherwise, said assessment shall computed from June 19, 2009 until full payment thereof
become final, executory and demandable.  16 pursuant to Section 249(C) of the NIRC of 1997.

On July 20, 2009, MEDICARD proceeded to file a petition for review SO ORDERED. 19

before the CT A, reiterating its position before the tax authorities. 

17

The CTA Division held that: (1) the determination of deficiency VAT
On June 5, 2014, the CTA Division rendered a Decision  affirming
18 is not limited to the issuance of Letter of Authority (LOA) alone as the
with modifications the CIR's deficiency VAT assessment covering CIR is granted vast powers to perform examination and assessment
taxable year 2006, viz.: functions; (2) in lieu of an LOA, an LN was issued to MEDICARD
informing it· of the discrepancies between its ITRs and VAT Returns
WHEREFORE, premises considered, the deficiency VAT and this procedure is authorized under Revenue Memorandum
assessment issued by [CIR] against [MEDICARD] covering taxable Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped
year 2006 ·is hereby AFFIRMED WITH from questioning the validity of the assessment on the ground of lack
of LOA since the assessment issued against MEDICARD contained
Basic Deficiency VAT ₱76,187,687.58
the requisite legal and factual bases that put MEDICARD on notice
of the deficiencies and it in fact availed of the remedies provided by Add: 25% Surcharge 44,046,921.90
law without questioning the nullity of the assessment; (4) the
amounts that MEDICARD earmarked , and eventually paid to Total ₱220,234.609.48
doctors, hospitals and clinics cannot be excluded from · the
computation of its gross receipts under the provisions of RR No. 4-
2007 because the act of earmarking or allocation is by itself an act of In addition, [MEDICARD] is ordered to pay:
ownership and management over the funds by MEDICARD which is
beyond the contemplation of RR No. 4-2007; (5) MEDICARD's (a) Deficiency interest at the rate of 20% per annum on the
earnings from its clinics and laboratory facilities cannot be excluded basic deficiency VAT of ₱l 76,187,687.58 computed from
from its gross receipts because the operation of these clinics and January 25, 2007 until full payment thereof pursuant to
laboratory is merely an incident to MEDICARD's main line of Section 249(B) of the NIRC of 1997, as amended; and
business as HMO and there is no evidence that MEDICARD
segregated the amounts pertaining to this at the time it received the (b) Delinquency interest at the rate of 20% per annum on the
premium from its members; and (6) MEDICARD was not able to total amount of ₱220,234,609.48 (representing basic
substantiate the amount pertaining to its January 2006 income and deficiency VAT of ₱l76,187,687.58 and 25% surcharge of
therefore has no basis to impose a 10% VAT rate. 20
₱44,046,921.90) and on the deficiency interest which have
accrued as afore-stated in (a), computed from June 19, 2009
Undaunted, MEDICARD filed a Motion for Reconsideration but it was until full payment thereof pursuant to Section 249(C) of the
denied. Hence, MEDICARD elevated the matter to the CTA en banc. NIRC of 1997, as amended."

In a Decision  dated September 2, 2015, the CTA en banc partially

21 SO ORDERED. 22

granted the petition only insofar as the 10% VAT rate for January
2006 is concerned but sustained the findings of the CTA Division in Disagreeing with the CTA en bane's decision, MEDICARD filed a
all other matters, thus: motion for reconsideration but it was denied.  Hence, MEDICARD
23

now seeks recourse to this Court via a petition for review

WHEREFORE, in view thereof, the instant Petition for Review is on certiorari.
hereby PARTIALLY GRANTED. Accordingly, the Decision date
June 5, 2014 is hereby MODIFIED, as follows: The Issues

"WHEREFORE, premises considered, the deficiency VAT l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
assessment issued by [CIR] against
2. WHETHER THE AMOUNTS THAT MEDICARD
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED EARMARKED AND EVENTUALLY PAID TO THE MEDICAL
WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to SERVICE PROVIDERS SHOULD STILL FORM PART OF
pay [CIR] the amount of ₱220,234,609.48, inclusive of the 25% ITS GROSS RECEIPTS FOR VAT PURPOSES. 24

surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as

amended, computed as follows: Ruling of the Court
The petition is meritorious. authorized representatives, other tax agents may not validly conduct
any of these kinds of examinations without prior authority.
The absence of an LOA violated
MEDICARD's right to due process With the advances in information and communication technology, the
Bureau of Internal Revenue (BIR) promulgated RMO No. 30-2003 to
An LOA is the authority given to the appropriate revenue officer lay down the policies and guidelines once its then incipient
assigned to perform assessment functions. It empowers or enables centralized Data Warehouse (DW) becomes fully operational in
said revenue officer to examine the books of account and other conjunction with its Reconciliation of Listing for Enforcement System
accounting records of a taxpayer for the purpose of collecting the (RELIEF System).  This system can detect tax leaks by matching the
26

correct amount of tax.   An LOA is premised on the fact that the
25 data available under the BIR's Integrated Tax System (ITS) with data
examination of a taxpayer who has already filed his tax returns is a gathered from third-party sources. Through the consolidation and
power that statutorily belongs only to the CIR himself or his duly cross-referencing of third-party information, discrepancy reports on
authorized representatives. Section 6 of the NIRC clearly provides as sales and purchases can be generated to uncover under declared
follows: income and over claimed purchases of Goods and services.

SEC. 6. Power of the Commissioner to Make Assessments and Under this RMO, several offices of the BIR are tasked with specific
Prescribe Additional Requirements for Tax Administration and functions relative to the RELIEF System, particularly with regard to
Enforcement. – LNs. Thus, the Systems Operations Division (SOD) under the
Information Systems Group (ISG) is responsible for: (1) coming up
with the List of Taxpayers with discrepancies within the threshold
(A) Examination of Return and Determination of Tax Due.- After a
amount set by management for the issuance of LN and for the
return has been filed as required under the provisions of this
system-generated LNs; and (2) sending the same to the taxpayer
Code, the Commissioner or his duly authorized
and to the Audit Information, Tax Exemption and Incentives Division
representative may authorize the examinationof any
(AITEID). After receiving the LNs, the AITEID under the Assessment
taxpayer and the assessment of the correct amount of tax: Provided,
however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer. Service (AS), in coordination with the concerned offices under the
ISG, shall be responsible for transmitting the LNs to the investigating
offices [Revenue District Office (RDO)/Large Taxpayers District
x x x x (Emphasis and underlining ours)
Office (LTDO)/Large Taxpayers Audit and Investigation Division
(LTAID)]. At the level of these investigating offices, the appropriate
Based on the afore-quoted provision, it is clear that unless action on the LN s issued to taxpayers with RELIEF data
authorized by the CIR himself or by his duly authorized discrepancy would be determined.
representative, through an LOA, an examination of the taxpayer
cannot ordinarily be undertaken. The circumstances contemplated
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which
under Section 6 where the taxpayer may be assessed through best-
laid down the "no-contact-audit approach"  in the CIR's exercise of
evidence obtainable, inventory-taking, or surveillance among others
its ·power to authorize any examination of taxpayer arid the
has nothing to do with the LOA. These are simply methods of
assessment of the correct amount of tax. The no-contact-audit
examining the taxpayer in order to arrive at .the correct amount of
approach  includes the process of computerized matching of sales
taxes. Hence, unless undertaken by the CIR himself or his duly
and purchases data contained in the Schedules of Sales and
Domestic Purchases and Schedule of Importation submitted by VAT IV. POLICIES AND GUIDELINES
taxpayers under the RELIEF System pursuant to RR No. 7-95, as
amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include xxxx
the matching of data from other information or returns filed by the
taxpayers with the BIR such as Alphalist of Payees subject to Final 8. In the event a taxpayer who has been issued an LN refutes
or Creditable Withholding Taxes. the discrepancy shown in the LN, the concerned taxpayer will be
given an opportunity to reconcile its records with those of the BIR
Under this policy, even without conducting a detailed examination of within
taxpayer's books and records, if the computerized/manual matching
of sales and purchases/expenses appears to reveal discrepancies, One Hundred and Twenty (120) days from the date of the issuance
the same shall be communicated to the concerned taxpayer through of the LN. However, the subject taxpayer shall no longer be entitled
the issuance of LN. The LN shall serve as a discrepancy notice to to the abatement of interest and penalties after the lapse of the sixty
taxpayer similar to a Notice for Informal Conference to the concerned (60)-day period from the LN issuance.
taxpayer. Thus, under the RELIEF System, a revenue officer may
begin an examination of the taxpayer even prior to the issuance of
an LN or even in the absence of an LOA with the aid of a 9. In case the above discrepancies remained unresolved at the
computerized/manual matching of taxpayers': documents/records. end of the One Hundred and Twenty (120)-day period, the
Accordingly, under the RELIEF System, the presumption that the tax revenue officer (RO) assigned to handle the LN shall
returns are in accordance with law and are presumed correct since recommend the issuance of [LOA) to replace the LN. The head of
these are filed under the penalty of perjury  are easily rebutted and
27 the concerned investigating office shall submit a summary list of LNs
the taxpayer becomes instantly burdened to explain a purported for conversion to LAs (using the herein prescribed format in Annex
discrepancy. "E" hereof) to the OACIR-LTS I ORD for the preparation of the
corresponding LAs with the notation "This LA cancels LN_________
No. "
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent
on the statutory requirement of an LOA before any investigation or
examination of the taxpayer may be conducted. As provided in the xxxx
RMO No. 42-2003, the LN is merely similar to a Notice for Informal
Conference. However, for a Notice of Informal Conference, which V. PROCEDURES
generally precedes the issuance of an assessment notice to be valid,
the same presupposes that the revenue officer who issued the same xxxx
is properly authorized in the first place.
B. At the Regional Office/Large Taxpayers Service
With this apparent lacuna in the RMOs, in November 2005, RMO No.
30-2003, as supplemented by RMO No. 42-2003, was amended by xxxx
RMO No. 32-2005 to fine tune existing procedures in handing
assessments against taxpayers'· issued LNs by reconciling various
7. Evaluate the Summary List of LNs for Conversion to LAs
revenue issuances which conflict with the NIRC. Among the
submitted by the RDO x x x prior to approval.
objectives in the issuance of RMO No. 32-2005 is to prescribe
procedure in the resolution of LN discrepancies, conversion of LNs to
LOAs and assessment and collection of deficiency taxes.
8. Upon approval of the above list, prepare/accomplish and sign the MEDICARD's right to due process warrant the reversal of the
corresponding LAs. assailed decision and resolution.

xxxx In the case of Commissioner of Internal Revenue v. Sony

Philippines, Inc.  ,  the Court said that:
29

Decision 11 G.R. No. 222743

Clearly, there must be a grant of authority before any revenue officer
xxxx can conduct an examination or assessment. Equally important is that
the revenue officer so authorized must not go beyond the authority
given. In the absence of such an authority, the assessment or
10. Transmit the approved/signed LAs, together with the duly
examination is a nullity.  (Emphasis and underlining ours)
30

accomplished/approved Summary List of LNs for conversion to LAs,

to the concerned investigating offices for the encoding of the
required information x x x and for service to the concerned The Court cannot convert the LN into the LOA required under the law
taxpayers. even if the same was issued by the CIR himself. Under RR No. 12-
2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon
xxxx
receipt of the LN, a taxpayer may avail of the BIR's Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses to
C. At the RDO x x x avail of the said program, the BIR may avail of administrative and
criminal .remedies, particularly closure, criminal action, or audit and
xxxx investigation. Since the law specifically requires an LOA and RMO
No. 32-2005 requires the conversion of the previously issued LN to
11. If the LN discrepancies remained unresolved within One Hundred an LOA, the absence thereof cannot be simply swept under the rug,
and Twenty (120) days from issuance thereof, prepare a summary as the CIR would have it. In fact Revenue Memorandum Circular No.
list of said LN s for conversion to LAs x x x. 40-2003 considers an LN as a notice of audit or investigation only for
the purpose of disqualifying the taxpayer from amending his returns.
xxxx
The following differences between an LOA and LN are crucial. First,
16. Effect the service of the above LAs to the concerned an LOA addressed to a revenue officer is specifically required under
taxpayers. 28 the NIRC before an examination of a taxpayer may be had while an
LN is not found in the NIRC and is only for the purpose of notifying
the taxpayer that a discrepancy is found based on the BIR's RELIEF
In this case, there is no dispute that no LOA was issued prior to the
System. Second, an LOA is valid only for 30 days from date of issue
issuance of a PAN and FAN against MED ICARD. Therefore no LOA
while an LN has no such limitation. Third, an LOA gives the revenue
was also served on MEDICARD. The LN that was issued earlier was
officer only a period of 10days from receipt of LOA to conduct his
also not converted into an LOA contrary to the above quoted
examination of the taxpayer whereas an LN does not contain such a
provision. Surprisingly, the CIR did not even dispute the applicability
limitation.  Simply put, LN is entirely different and serves a different
31

of the above provision of RMO 32-2005 in the present case which is

purpose than an LOA. Due process demands, as recognized under
clear and unequivocal on the necessity of an LOA for the·
RMO No. 32-2005, that after an LN has serve its purpose, the
assessment proceeding to be valid. Hence, the CTA's disregard of
revenue officer should have properly secured an LOA before That the BIR officials herein were not shown to have acted
proceeding with the further examination and assessment of the unreasonably is beside the point because the issue of their lack of
petitioner. Unfortunarely, this was not done in this case. authority was only brought up during the trial of the case. What is
crucial is whether the proceedings that led to the issuance of VAT
Contrary to the ruling of the CTA en banc, an LOA cannot be deficiency assessment against MEDICARD had the prior approval
dispensed with just because none of the financial books or records and authorization from the CIR or her duly authorized
being physically kept by MEDICARD was examined. To begin with, representatives. Not having authority to examine MEDICARD in the
Section 6 of the NIRC requires an authority from the CIR or from his first place, the assessment issued by the CIR is inescapably void.
duly authorized representatives before an examination "of a
taxpayer" may be made. The requirement of authorization is At any rate, even if it is assumed that the absence of an LOA is not
therefore not dependent on whether the taxpayer may be required to fatal, the Court still partially finds merit in MEDICARD's substantive
physically open his books and financial records but only on whether arguments.
a taxpayer is being subject to examination.
The amounts earmarked and
The BIR's RELIEF System has admittedly made the BIR's eventually paid by MEDICARD to
assessment and collection efforts much easier and faster. The ease the medical service providers do not
by which the BIR's revenue generating objectives is achieved is no form part of gross receipts.for VAT
excuse however for its non-compliance with the statutory purposes
requirement under Section 6 and with its own administrative
issuance. In fact, apart from being a statutory requirement, an LOA is MEDICARD argues that the CTA en banc seriously erred in affirming
equally needed even under the BIR's RELIEF System because the the ruling of the CT A Division that the gross receipts of an HMO for
rationale of requirement is the same whether or not the CIR conducts VAT purposes shall be the total amount of money or its equivalent
a physical examination of the taxpayer's records: to prevent undue actually received from members undiminished by any amount paid or
harassment of a taxpayer and level the playing field between the payable to the owners/operators of hospitals, clinics and medical and
government' s vast resources for tax assessment, collection and dental practitioners. MEDICARD explains that its business as an
enforcement, on one hand, and the solitary taxpayer's dual need to HMO involves two different although interrelated contracts. One is
prosecute its business while at the same time responding to the BIR between a corporate client and MEDICARD, with the corporate
exercise of its statutory powers. The balance between these is client's employees being considered as MEDICARD members; and
achieved by ensuring that any examination of the taxpayer by the the other is between the health care institutions/healthcare
BIR' s revenue officers is properly authorized in the first place by professionals and MED ICARD.
those to whom the discretion to exercise the power of examination is
given by the statute. Under the first, MEDICARD undertakes to make arrangements with
healthcare institutions/healthcare professionals for the coverage of
MEDICARD members under specific health related services for a
specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contract with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees per
individual, regardless of the amount involved, already includes the
VAT of 10%/20% excluding the remaining 80o/o because MED
ICARD would earmark this latter portion for medical utilization of its Section 4.108-4. x x x. "Gross receipts"  refers to the total amount
members. Lastly, MEDICARD also assails CIR's inclusion in its gross of money or its equivalent representing the contract price,
receipts of its earnings from medical services which it actually and compensation, service fee, rental or royalty, including the amount
directly rendered to its members. charged for materials supplied with the services and deposits applied
as payments for services rendered, and advance payments
Since an HMO like MEDICARD is primarily engaged m arranging for actually or constructively received during the taxable period for the
coverage or designated managed care services that are needed by services performed or to be performed for another person,
plan holders/members for fixed prepaid membership fees and for a excluding the VAT.  34

specified period of time, then MEDICARD is principally engaged in

the sale of services. Its VAT base and corresponding liability is, thus, In 2007, the BIR issued RR No. 4-2007 amending portions of RR No.
determined under Section 108(A)  of the Tax Code, as amended by
32
16-2005, including the definition of gross receipts in general. 35

Republic Act No. 9337.

According to the CTA en banc, the entire amount of membership
Prior to RR No. 16-2005, an HMO, like a pre-need company, is fees should form part of MEDICARD's gross receipts because the
treated for VAT purposes as a dealer in securities whose gross exclusions to the gross receipts under RR No. 4-2007 does not apply
receipts is the amount actually received as contract price without to MEDICARD. What applies to MEDICARD is the definition of gross
allowing any deduction from the gross receipts.  This restrictive tenor
33
receipts of an HMO under RR No. 16-2005 and not the modified
changed under RR No. 16-2005. Under this RR, an HMO's gross definition of gross receipts in general under the RR No. 4-2007.
receipts and gross receipts in general were defined, thus:
The CTA en banc overlooked that the definition of gross receipts
Section 4.108-3. xxx under. RR No. 16-2005 merely presumed that the amount received
by an HMO as membership fee is the HMO's compensation for their
xxxx services. As a mere presumption, an HMO is, thus, allowed to
establish that a portion of the amount it received as membership fee
does NOT actually compensate it but some other person, which in
HMO's gross receipts shall be the total amount of money or its
this case are the medical service providers themselves. It is a well-
equivalent representing the service fee actually or constructively
settled principle of legal hermeneutics that words of a statute will be
received during the taxable period for the services performed or to
interpreted in their natural, plain and ordinary acceptation and
be performed for another person, excluding the value-added tax. The
signification, unless it is evident that the legislature intended a
compensation for their services representing their service fee,
technical or special legal meaning to those words. The Court cannot
is presumed to be the total amount received as enrollment fee
read the word "presumed" in any other way.
from their members plus other charges received.

It is notable in this regard that the term gross receipts as elsewhere

mentioned as the tax base under the NIRC does not contain any
specific definition.  Therefore, absent a statutory definition, this Court
36

has construed the term gross receipts in its plain and ordinary
meaning, that is, gross receipts is understood as comprising the
entire receipts without any deduction.  Congress, under Section 108,
37

could have simply left the term gross receipts similarly undefined and
its interpretation subjected to ordinary acceptation,. Instead of doing It is a cardinal rule in statutory construction that no word, clause,
so, Congress limited the scope of the term gross receipts for VAT sentence, provision or part of a statute shall be considered
purposes only to the amount that the taxpayer received for the surplusage or superfluous, meaningless, void and insignificant. To
services it performed or to the amount it received as advance this end, a construction which renders every word operative is
payment for the services it will render in the future for another preferred over that which makes some words idle and nugatory. This
person. principle is expressed in the maxim Ut magisvaleat quam pereat, that
is, we choose the interpretation which gives effect to the whole of the
In the proceedings ·below, the nature of MEDICARD's business and statute – it’s every word.
the extent of the services it rendered are not seriously disputed. As
an HMO, MEDICARD primarily acts as an intermediary between the In Philippine Health Care Providers, Inc. v. Commissioner of Internal
purchaser of healthcare services (its members) and the healthcare Revenue, the Court adopted the principal object and purpose object
38

providers (the doctors, hospitals and clinics) for a fee. By enrolling in determining whether the MEDICARD therein is engaged in the
membership with MED ICARD, its members will be able to avail of business of insurance and therefore liable for documentary stamp
the pre-arranged medical services from its accredited healthcare tax. The Court held therein that an HMO engaged in preventive,
providers without the necessary protocol of posting cash bonds or diagnostic and curative medical services is not engaged in the
deposits prior to being attended to or admitted to hospitals or clinics, business of an insurance, thus:
especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and To summarize, the distinctive features of the cooperative are the
laboratory services, which depends upon its member's choice. rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of
Thus, in the course of its business as such, MED ICARD members service as well as payment, the substantial reduction in cost by
can either avail of medical services from MEDICARD's accredited quantity purchasing in short, getting the medical job done and
healthcare providers or directly from MEDICARD. In the former, paid for; not, except incidentally to these features, the
MEDICARD members obviously knew that beyond the agreement to indemnification for cost after .the services is rendered. Except
pre-arrange the healthcare needs of its ·members, MEDICARD the last, these are not distinctive or generally characteristic of
would not actually be providing the actual healthcare service. Thus, the insurance arrangement. There is, therefore, a substantial
based on industry practice, MEDICARD informs its would-be difference between contracting in this way for the rendering of
member beforehand that 80% of the amount would be earmarked for service, even on the contingency that it be needed, and contracting
medical utilization and only the remaining 20% comprises its service merely to stand its cost when or after it is rendered.  (Emphasis
39

fee. In the latter case, MEDICARD's sale of its services is exempt ours)
from VAT under Section 109(G).
In sum, the Court said that the main difference between an HMO arid
The CTA's ruling and CIR's Comment have not pointed to any an insurance company is that HMOs undertake to provide or arrange
portion of Section 108 of the NIRC that would extend the definition of for the provision of medical services through participating physicians
gross receipts even to amounts that do not only pertain to the while insurance companies simply undertake to indemnify the
services to be performed: by another person, other than the insured for medical expenses incurred up to a pre-agreed limit. In the
taxpayer, but even to amounts that were indisputably utilized not by present case, the VAT is a tax on the value added by the
MED ICARD itself but by the medical service providers. performance of the service by the taxpayer. It is, thus, this service
and the value charged thereof by the taxpayer that is taxable under
the NIRC.
To be sure, there are pros and cons in subjecting the entire amount As to the CIR's argument that the act of earmarking or allocation is
of membership fees to VAT.  But the Court's task however is not to
40
by itself an act of ownership and management over the funds, the
weigh these policy considerations but to determine if these Court does not agree.  On the contrary, it is MEDICARD's act of
1âwphi1

considerations in favor of taxation can even be implied from the earmarking or allocating 80% of the amount it received as
statute where the CIR purports to derive her authority. This Court membership fee at the time of payment that weakens the ownership
rules that they cannot because the language of the NIRC is pretty imputed to it. By earmarking or allocating 80% of the amount,
straightforward and clear. As this Court previously ruled: MEDICARD unequivocally recognizes that its possession of the
funds is not in the concept of owner but as a mere administrator of
What is controlling in this case is the well-settled doctrine of strict the same. For this reason, at most, MEDICARD's right in relation to
interpretation in the imposition of taxes, not the similar doctrine as these amounts is a mere inchoate owner which would ripen into
applied to tax exemptions. The rule in the interpretation of tax laws is actual ownership if, and only if, there is underutilization of the
that a statute will not be construed as imposing a tax unless it does membership fees at the end of the fiscal year. Prior to that, MEDI
so clearly, expressly, and unambiguously. A tax cannot be CARD is bound to pay from the amounts it had allocated as an
imposed without clear and express words for that purpose. administrator once its members avail of the medical services of
Accordingly, the general rule of requiring adherence to the MEDICARD's healthcare providers.
letter in construing statutes applies with peculiar strictness to
tax laws and the provisions of a taxing act are not to be Before the Court, the parties were one in submitting the legal issue
extended by implication. In answering the question of who is of whether the amounts MEDICARD earmarked, corresponding to
subject to tax statutes, it is basic that in case of doubt, such statutes 80% of its enrollment fees, and paid to the medical service providers
are to be construed most strongly against the government and in should form part of its gross receipt for VAT purposes, after having
favor of the subjects or citizens because burdens are not to be paid the VAT on the amount comprising the 20%. It is significant to
imposed nor presumed to be imposed beyond what statutes note in this regard that MEDICARD established that upon receipt of
expressly and clearly import. As burdens, taxes should not be unduly payment of membership fee it actually issued two official receipts,
exacted nor assumed beyond the plain meaning of the tax one pertaining to the VAT able portion, representing compensation
laws.   (Citation omitted and emphasis and underlining ours)
41
for its services, and the other represents the non-vatable portion
pertaining to the amount earmarked for medical utilization.:
For this Court to subject the entire amount of MEDICARD's gross Therefore, the absence of an actual and physical segregation of the
receipts without exclusion, the authority should have been amounts pertaining to two different kinds · of fees cannot arbitrarily
reasonably founded from the language of the statute. That language disqualify MEDICARD from rebutting the presumption under the law
is wanting in this case. In the scheme of judicial tax administration, and from proving that indeed services were rendered by its
the need for certainty and predictability in the implementation of tax healthcare providers for which it paid the amount it sought to be
laws is crucial. Our tax authorities fill in the details that Congress excluded from its gross receipts.
may not have the opportunity or competence to provide. The
regulations these authorities issue are relied upon by taxpayers, who With the foregoing discussions on the nullity of the assessment on
are certain that these will be followed by the courts. Courts, however, due process grounds and violation of the NIRC, on one hand, and
will not uphold these authorities' interpretations when dearly absurd, the utter lack of legal basis of the CIR's position on the computation
erroneous or improper.  The CIR's interpretation of gross receipts in
42
of MEDICARD's gross receipts, the Court finds it unnecessary, nay
the present case is patently erroneous for lack of both textual and useless, to discuss the rest of the parties' arguments and counter-
non-textual support. arguments.
In fine, the foregoing discussion suffices for the reversal of the Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A)
assailed decision and resolution of the CTA en banc  grounded as it of the National Internal Revenue Code, as amended by Republic Act
is on due process violation. The Court likewise rules that for No. 9337, for purposes of determining its Value-Added Tax liability,
purposes of determining the VAT liability of an HMO, the amounts is hereby declared to EXCLUDE the eighty percent (80%) of the
earmarked and actually spent for medical utilization of its members amount of the contract price earmarked as fiduciary funds for the
should not be included in the computation of its gross receipts. medical utilization of its members. Further, the Value-Added Tax
deficiency assessment issued against Medicard Philippines, Inc. is
WHEREFORE, in consideration of the foregoing disquisitions, the hereby declared unauthorized for having been issued without a
petition is hereby GRANTED. The Decision dated September 2, Letter of Authority by the Commissioner of Internal Revenue or his
2015 and Resolution dated January 29, 2016 issued by the Court of duly authorized representatives.
Tax Appeals en bane  in CTA EB No. 1224 are REVERSED and
SET ASIDE. The definition of gross receipts under Revenue SO ORDERED.

SECOND DIVISION The facts  are undisputed.

6

July 12, 2017 Petitioner Commissioner of Internal Revenue (CIR) is authorized by

law, among others, to investigate or examine and, if necessary, issue
G.R. No. 183408 assessments for deficiency taxes.

COMMISSIONER OF INTERNAL REVENUE, Petitioner On the other hand, respondent Lancaster Philippines,

vs. Inc. (Lancaster) is a domestic corporation established in 1963 and is
LANCASTER PHILIPPINES, INC., Respondent engaged in the production, processing, and marketing of tobacco.

DECISION In 1999, the Bureau of Internal Revenue (BIR) issued Letter of

Authority (LOA) No. 00012289 authorizing its revenue officers to
examine Lancaster's books of accounts and other accounting
MARTIRES, J.:
records for all internal revenue taxes due from taxable year 1998 to
an unspecified date. The LOA reads:
This is a Petition for Review on Certiorari  under Rule 45 of the Rules
1

of Court seeking to reverse and set aside the 30 April 2008

SEPT. 30 1999
Decision  and 24 June 2008 Resolution  of the Court of Tax
2 3

Appeals (CTA) En Banc in CTA EB No. 352.

LETTER OF AUTHORITY
The assailed decision and resolution affirmed the 12 September
2007 Decision  and 12 December 2007 Resolution  of the CTA First
4 5 LANCASTER PHILS. INC.
Division (CTA Division) in CTA Case No. 6753. 11th Flr. Metro Bank Plaza
Makati City
THE FACTS
SIRJMADAM/GENTLEMEN:
The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be April 1 - December 31, 1998
Supervise by GH Catalina_Leny Barrion of the Special Team created (9/12x ₱l1,496,770.18 x 34%) ₱2,913,676.4
pursuant to RSO 770-99 is/are authorized to examine your books of
accounts and other accounting records for a11 internal revenue January 1 - March 31, 1999
taxes for the period from example year, 1998 to ______, 19___. He (3/12x ₱l1,496,770.18 x 33%) 948,483.54
is/[t]hey are provided with the necessary identification card(s) which
shall be presented to you upon request. Income tax still due per investigation ₱3,880,159.94
Interest (6/15/99 to 10115/02) .66 2,560,905.56
It is requested that all facilities be extended to the Revenue Officer(s)
in order to expedite the examination. Compromise Penalty 25,000
TOTAL DEFlCIENCY INCOME TAX ₱6,466,065.50
You will be duly informed of the results of the examination upon
approval of the report submitted by the aforementioned Revenue
Officer(s). 7 DETAILS OF DISCREPANCIES
Assessment No. LTAID II-98-00007
After the conduct of an examination pursuant to the LOA, the BIR
issued a Preliminary Assessment Notice (PAN)  which cited
8 A. INCOME TAX (₱3,880,159.94) - Taxpayer's fiscal year covers
Lancaster for: April 1998 to March 1999. Verification of the books of accounts and
pertinent documents disclosed that there was an overstatement of
purchases for the year. Purchase Invoice Vouchers (PIVs) for
1) overstatement of its purchases for the fiscal year April
February and March 1998 purchases amounting to ₱ll,496,770.18
1998 to March1999;  and 2) noncompliance with the generally
were included as part of purchases for taxable year 1998 in violation
accepted accountingprinciple of proper matching of cost and
of Section 45 of the National Internal Revenue Code in relation to
revenue.  More concretely, the BIR disallowed the purchases of
9

Section 43 of the same and Revenue Regulations No. 2 which states

tobacco from farmers covered by Purchase Invoice Vouchers (PIVs)
that the Crop-Basis method of reporting income may be used by a
for the months of February and March 1998 as deductions against
farmer engaged in producing crops which take more than one (1)
income for the fiscal year April 1998 to March 1999. The computation
year from the time of planting to the time of gathering and disposing
of Lancaster's tax deficiency, with the details of discrepancies, is
of crop, in such a case, the entire cost of producing the crop must be
reproduced below:
taken as deduction in the year in which the gross income from the
crop is realized and that the taxable income should be computed
INCOME TAX: upon the basis of the taxpayer's annual accounting period, (fiscal or
calendar year, as the case may be) in accordance with the method of
Taxable Income per ITR -0- accounting regularly employed in keeping with the books of the
Add: Adjustments-Disallowed purchases 11,496,770.18 taxpayer. Furthermore, it did not comply with the generally accepted
principle of proper matching of cost and revenue. 10

Adjusted Taxable Income per

₱11,496,770.18
Investigation Lancaster replied  to the PAN contending, among other things, that
11

for the past decades, it has used an entire 'tobacco-cropping

INCOME TAX DUE-Basic
season' to determine its total purchases covering a one-year period
from 1 October up to 30 September of the followingyear (as against
its fiscal year which is from 1 April up to 31 March of the The issues  raised by the parties for the resolution of the CTA
19

followingyear); that it has been adopting the 6~month timing Division were:

difference to conform to the matching concept (of cost and revenue);
and that this has long been installed as part of the company's system I
and consistently applied in its accounting books.12

WHETHER OR NOT PETITIONER COMPLIED WITH THE

Invoking the same provisions of the law cited in the GENERALLY ACCEPTED ACCOUNTING PRINCIPLE OF PROPER
assessment, i.e., Sections 43  and 45  of the National Internal
13 14
MATCHING OF COST AND REVENUE;
Revenue Code (NJRC), in conjunction with Section 45  of Revenue
15

Regulation No. 2, as amended, Lancaster argued that the February II

and March 1998 purchases should not have been disallowed. It
maintained that the situation of farmers engaged in producing
tobacco, like Lancaster, is unique in that the costs, i.e., purchases, WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT
are taken as of a different period and posted in the year in which the AGAINST PETITIONER FOR THE TAXABLE YEAR 1998 IN THE
gross income from the crop is realized. Lancaster concluded that it AGGREGATE AMOUNT OF ₱6,466,065.50 SHOULD BE
correctly posted the subject purchases in the fiscal year ending CANCEILED AND WITHDRAWN BY RESPONDENT.
March 1999 as it was only in this year that the gross income from the
crop was realized. After trial, the CTA Division granted the petition of Lancaster,
disposing as follows;
Subsequently on 6 November 2002, Lancaster received from the BIR
a final assessment notice (FAN),  captioned Formal Letter of
16 IN VIEW OF THE FOREGOING, the subject Petition for Review is
Demand andAudit Result/Assessment .Notice LTAID II IT-98- hereby GRANTED. Accordingly, respondent is ORDERED to
00007, dated 11 October2002, which assessed Lancaster's CANCEL and WITHDRAW the deficiency income tax assessment
deficiency income tax amounting to Pl l,496,770.18, as a issued against petitioner under Formal l;etter of Demand and Audit
consequence of the disallowance of purchases claimed for Result/Assessment Notice No. L TAID II IT-98-00007 dated October
the taxable year ending199931. March 1999. 11, 2002, in the amount of ₱6,466,065.50, covering the fiscal year
from April l, 1998 to March 31, 1999. 20

Lancaster duly protested  the FAN. There being no action taken by

17

the Commissioner on its protest, Lancaster filed on 21 August 2003 The CIR move  but failed to obtain reconsideration of the CTA
21

a petition for review  before the CTA Division.

18 Division ruling.22

The Proceedings before the CTA Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek
a reversal of the decision and the resolution of the CTA Division.
In its petition before the CTA Division, Lancaster essentially
reiterated its arguments in the protest against the assessment, However, the CTA En Banc found no reversible error in the CTA
maintaining that the tobacco purchases in February and March 1998 Division's ruling, thus, it affirmed the cancellation of the assessment
are deductible in its fiscal year ending 31 March 1999. against Lancaster. The dispositive portion of the decision of the CTA
En Banc states:
WHEREFORE, premises considered, the present Petition for Review the latter's fiscal year from 1 April 1997 to 31 March 1998.
is hereby DENIED DUE COURSE, and, accordingly DISMISSED for Additionally, the CIR posits that Lancaster did not raise the issue on
lack of merit.
24
the scope of authority of the revenue examiners at any stage of the
proceedings before the CTA and, consequently, the CTA had no
The CTA En Banc likewise denied  the motion for reconsideration
25 jurisdiction to rule on said issue.
from its Decision.
On both counts, the CIR is mistaken.
Hence, this petition.
A. The Jurisdiction of the CTA
The CIR assigns the following errors as committed by the CTA En
Banc: Preliminarily, we shall take up the CTA's jurisdiction to rule on the
issue of the scope of authority of the revenue officers to conduct the
I. examination of Lancaster's books of accounts and accounting
records.
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING
THAT PETITIONER'S REVENUE OFFICERS EXCEEDED THEIR The law vesting unto the CTA its jurisdiction is Section 7 of Republic
AUTHORITY TO INVESTIGATE THE PERJOD NOT COVERED BY Act No. 1125 (R.A. No. 1125),  which in part provides:
27

THEIR LETTER OF AUTHORITY.

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise
II. exclusive appellate jurisdiction to review by appeal, as herein
provided:
THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING
PETITIONER TO CANCEL AND WITHDRAW THE DEFICIENCY (1) Decisions of the Collector of Internal Revenue in cases involving
ASSESSMENT ISSUED AGAINST RESPONDENT. 26 disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code or other
THE COURT'S RULING
law or part of law administered by the Bureau of Internal Revenue; x
x x. (emphasis supplied)
We deny the petition.
Under the aforecited provision, the jurisdiction of the CTA is not
The CTA En Banc did not err when it ruled limited only to cases which involve decisions or inactions of the CIR
that the BIR revenue officers had on matters relating to assessments or :refunds but also includes
exceeded their authority. other cases arising from the NIRC o:r related laws administered by
the BIR. 28 Thus, for instance, we had once held that the question of
To support its first assignment of error, the CIR argues that the whether or not to impose a deficiency tax assessment comes within
revenue officers did not exceed their authority when, upon the purview of the words "othermatters arising under the National
examination (of the Lancaster's books of accounts and other Internal Revenue Code."[[29]
accounting records), they verified that Lancaster made purchases for
February and March of 1998, which purchases were not declared in
The jurisdiction of the CTA on such other matters arising under The Bureau shall give effect to and administer the supervisory and
theNIRC was retained under the amendments introduced by R.A No. police powers conferred to it by this Code or other laws. (emphasis
9282. Under R.A. No. 9282, Section 7 now reads:
30
supplied)

Sec. 7. Jurisdiction. - The CTA shall exercise: In connection therewith, the CIR may authorize the examination of
any taxpayer and correspondingly make an assessment whenever
a. Exclusive appellate jurisdiction to review by appeal, as herein necessary.  Thus, to give more teeth to such power of the CIR, to
31

provided: make an assessment, the NIRC authorizes the CIR to examine any
book, paper, record, or data of any person.  The powers granted by
32

law to the CIR are intended, among other things, to determine the
1. Decisions of the Commissioner of Internal Revenue in cases
liability of any person for any national internal revenue tax.
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws It is pursuant to such pertinent provisions of the NIRC conferring the
administered by the Bureau of Internal Revenue; powers to the CIR that the petitioner (CIR) had, in this case,
authorized its revenue officers to conduct an examination of the
books of account and accounting records of Lancaster, and
2. Inaction by the Commissioner of Internal Revenue in cases
eventually issue a deficiency assessment against it.
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other From the foregoing, it is clear that the issue on whether the revenue
laws administered by the Bureau of Internal Revenue, where the officers who had conducted the examination on Lancaster exceeded
National Internal Revenue Code provides a specific period of action. their authority pursuant to LOA No. 00012289 may be considered as
in which case the inaction shall be deemed a denial; x x x." covered by the terms "other matters" under Section 7 of R.A. No.
(emphasis supplied) 1125 or its amendment, R.A. No. 9282. The authority to make an
examination or assessment, being a matter provided for by the
NIRC, is well within the exclusive and appellate jurisdiction of the
Is the question on the authority of revenue officers to examine the
CTA.
books and records of any person cognizable by the CTA?

On whether the CTA can resolve an issue which was not raised by
It must be stressed that the assessment of inten1al revenue taxes is
the parties, we rule in the affirmative.
one of the duties of the BIR. Section 2 of the NIRC states:

Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised

Sec. 2. Powers and Duties oftheBureau of Internal Revenue. - The
Rules of the Court of Tax Appeals,  the CT A is not bound by the
33

Bureau of Internal Revenue shall be under the supervision and

issues specifically raised by the parties but may also rule upon
control of the Department of Fin[:l.11ce and its powers: and duties
related issues necessary to achieve an orderly disposition of the
shall comprehend the assessment and collection of all national
case. The text of the provision reads:
internal revenue taxes, fees, andcharges, and the enforcement of all
forfeitures, penalties, and fines connected therewith, including the
execution of judgments in all cases decided in its favor by the Court SECTION 1. Rendition of judgment. - x xx
of Tax Appeals and the ordinary courts.
In deciding the case, the Court may not limit itself to the issues In this case, a perusal of LOA No. 00012289 indeed shows that the
stipulated by the parties but may also rule upon related issues period of examination is the taxable year 1998. For better clarity, the
necessary to achieve an orderly disposition of the case. pertinent portion of the LOA is again reproduced, thus:

The above section is clearly worded. On the basis thereof, the CTA The bearer(s) hereof x x x is/are authorized to examine your books
Division was, therefore, well within its authority to consider in its of accounts and other accounting records for all internal revenue
decision the question on the scope of authority of the revenue taxes for the period from taxable year, 1998 to __, 19_. x x x."
officers who were named in the LOA even though the parties had not (emphasis supplied)
raised the same in their pleadings or memoranda. The CTA En Banc
was likewise correct in sustaining the CTA Division's view concerning Even though the date after the words "taxable year 1998 to" is
such matter. unstated, it is not at all difficult to discern that the period of
examination is the whole taxable year 1998. This means that the
B. The Scope of the Authority examination of Lancaster must cover the FY period from 1April1997
of the Examining Officers to 31March1998. It could not have contemplated a longer period.
The examination for the full taxable year 1998 only is consistent with
In the assailed decision of the CTA Division, the trial court observed the guideline in Revenue Memorandum Order (RMO) No. 43-90,
that LOA No. 00012289 authorized the BIR officers to examine the dated 20 September 1990, that the LOA shall cover a taxable
books of account of Lancaster for the taxable year 1998 only or, period not exceeding one taxable year.  In other words, absent
35

since Lancaster adopted a fiscal year (FY), for the any other valid cause, the LOA issued in this case is valid in all
period 1April1997 to 31March1998. However, the deficiency income respects.
tax assessment which the BIR eventually issued against Lancaster
was based on the disallowance of expenses reported in FY 1999, or Nonetheless, a valid LOA does not necessarily clothe validity to an
for the period 1 April 1998 to 31March1999. The CTA concluded that assessment issued on it, as when the revenue officers designated in
the revenue examiners had exceeded their authority when they the LOA act in excess or outside of the authority granted them under
issued the assessment against Lancaster and, consequently, said LOA. Recently in CIR v. De La Salle University, Inc.  we 36

declared such assessment to be without force and effect. accorded validity to the LOA authorizing the examination of DLSU
for "Fiscal Year Ending 2003and Unverified Prior Years" and
We agree. correspondingly held the assessment fortaxable year 2003 as valid
because this taxable period is specified in the LOA. However, we
declared void the assessments for taxable years 2001 and 2002 for
The audit process normally commences with the issuance by the
having been unspecified on separate LOAs as required under RMO
CIR of a Letter of Authority. The LOA gives notice to the taxpayer
No. 43-90.
that it is under investigation for possible deficiency tax assessment;
at the same time it authorizes or empowers a designated revenue
officer to examine, verify, and scrutinize a taxpayer's books and Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,  we affirmed
37

records, in relation to internal revenue tax liabilities for a particular the cancellation of a deficiency VAT assessment because, while the
period.34 LOA covered "the period 1997and unverified prior years, " the said
deficiency was arrived at based on the records of a later year,
from January to March 1998,  or using the fiscal year which ended
on 31March1998. We explainedthat the CIR knew which period
should be covered by the investigation and that if the CIR wanted or This point alone would have sufficed to invalidate the subject
intended the investigation to include the year 1998, it would have deficiency income tax assessment, thus, obviating any further
done so by including it in the LOA or by issuing another LOA. 38
necessity to resolve the issue on whether Lancaster erroneously
claimed the February and March 1998 expenses as deductions
The present case is no different from Sony in that the subject LOA against income for FY 1999.
specified that the examination should be for the taxable year 1998
only but the subsequent assessment issued against Lancaster But, as the CTA did, we shall discuss the issue on the disallowance
involved disallowed expenses covering the next fiscal year, or the for the proper guidance not only of the parties, but the bench and the
period ending 31 March 1999. This much is clear from the notice of bar as well.
assessment, the relevant portion of which we again restate as
follows: II.
1âwphi1

INCOME TAX: The CTA En Banc correctly sustained the

order cancelling and withdrawing
Taxable Income per ITR -0- the deficiency tax assessment.
Add: Adjustments-Disallowed purchases 11,496, 770.18
To recall, the assessment against Lancaster for deficiency income
Adjusted Taxable Income per tax stemmed from the disallowance of its February and March 1998
₱l 1,496,770.18
Investigation purchases which Lancaster posted in its fiscal year ending on 31
March 1999 (FY 1999) instead of the fiscal year ending on
INCOME TAX DUE-Basic 31March1998 (FY 1998).
April 1 -December 31, 1998
(9/12xPl1,496,770.18 x 34%) ₱2,913,676.4 On the one hand, the BIR insists that the purchases in question
should have been reported in FY 1998 in order to conform to the
January 1-March 31, 1999 generally accepted accounting principle of proper matching of cost
(3/12xPl1,496,770.18 x 33%) 948,483.54 and revenue. Thus, when
Income tax still due per investigation ₱3,880,159.94
Lancaster reported the said purchases in FY 1999, this resulted in
Interest (6/15/99 to 10/15/02) .66 2,560,905.56 overstatement of expenses warranting their disallowance and, by
Compromise Penalty 25,000 consequence, resulting in the deficiency in the payment of its income
tax for FY 1999.
TOTAL DEFICIENCY INCOME TAX ₱6,466,065.50
(emphasis supplied) Upon the other hand, Lancaster justifies the inclusion of the February
and March 1998 purchases in its FY 1999 considering that they
The taxable year covered by the assessment being outside of the coincided with its crop year covering the period of October 1997 to
period specified in the LOA in this case, the assessment issued September 1998. Consistent with Revenue Audit
against Lancaster is, therefore, void. Memorandum (RAM)  No. 2-95,  Lancaster argues that its purchases
39

in February and March 1998 were properly posted in FY 1999, or the

year in which its gross income from the crop was realized. Lancaster
concludes that by doing so, it had complied with the matching tax law will not recognize deductions for contingent future losses
concept that was also relied upon by the BIR in its assessment. except in very limited situations. Good accounting, on the other
hand, requires their recognition. Once this fundamental difference in
The issue essentially boils down to the proper timing when approach is accepted, income tax accounting methods can be
Lancaster should recognize its purchases in computing its understood more easily.  (emphasis supplied)
43

taxable income.  Such issue directly correlates to the fact that

Lancaster's 'crop year  ' does not exactly coincide with its fiscal year While there may be differences between tax and accounting,  it 44

for tax purposes. cannot be said that the two mutually exclude each other. As already
made clear, tax laws borrowed concepts that had origins from
Noticeably, the records of this case are rife with terms and concepts accounting. In truth, tax cannot do away with accounting. It relies
in accounting. As a science, accounting   pervades many aspects of
40 upon approved accounting methods and practices to effectively carry
financial planning, forecasting, and decision making in business. Its out its objective of collecting the proper amount of taxes from the
reach, however, has also permeated tax practice. taxpayers. Thus, an important mechanism established in many tax
systems is the requirement for taxpayers to make a return of their
true income.  Maintaining accounting books and records, among
45

To put it into perspective, although the foundations of accounting

other important considerations, would in turn assist the taxpayers in
were built principally to analyze finances and assist businesses,
complying with their obligation to file their income tax returns. At the
many of its principles have since been adopted for purposes of
same time, such books and records provide vital information and
taxation.  In our jurisdiction, the concepts in business accounting,
41

possible bases for the government, after appropriate audit, to make

including certain generally accepted accounting principles (GAAP),
an assessment for deficiency tax whenever so warranted under the
embedded in the NIRC comprise the rules on tax accounting.
circumstances.
To be clear, the principles under financial or business accounting, in
The NIRC, just like the tax laws in other jurisdictions, recognizes the
theory and application, are not necessarily interchangeable with
important facility provided by generally accepted accounting
those in tax accounting. Thus, although closely related, tax and
principles and methods to the primary aim of tax laws to collect the
business accounting had invariably produced concepts that at some
correct amount of taxes. The NIRC even devoted a whole chapter on
point diverge in understanding or usage. For instance, two of such
accounting periods and methods of accounting, some relevant
important concepts are taxable income and business income (or
provisions of which we cite here for more emphasis:
accounting income). Much of the difference can be attributed to the
distinct purposes or objectives that the concepts of tax and business
accounting are aimed at. Chief Justice Querube Makalintal made an CHAPTER VIII
apt observation on the nature of such difference. In Consolidated
Mines, Inc. v. CTA, he noted:
42
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

While taxable income is based on the method of accounting used by Sec. 43. General Rule.  - The taxable income shall be computed
the taxpayer, it will almost always differ from accounting income. upon the basis of the taxpayer's annual accounting period (fiscal
This is so because of a fundamental difference in the ends the two year or calendar year, as the case may be) in accordance with the
concepts serve. Accounting attempts to match cost against method of accounting regularly employed in keeping the books of
revenue.  Tax law is aimed at collecting revenue. It is quick to treat such taxpayer; but if no such method of accounting has been so
an item as income, slow to recognize deductions or losses. Thus, the employed, or if the method employed does not clearly reflect the
income, the computation shall be made in accordance with such Sec. 46. Change of Accounting Period. - If a taxpayer, other than
method as in the opinion of the Commissioner clearly reflects the an individual, changes his accounting period from fiscal year to
income. calendar year, from calendar year to fiscal year, or from one fiscal
year to another, the net income shall, with the approval of the
If the taxpayer's annual accounting period is other than a fiscal year, Commissioner, be computed on the basis of such new accounting
as defined in Section 22(Q), or if the taxpayer has no annual period, subject to the provisions of Section 47.
accounting period, or does not keep books, or if the taxpayer is an
individual, the taxable income shall be computed on the basis of the xxxx
calendar year.
Sec. 48. Accounting for Long-term Contracts.  - Income from
Sec. 44. Period in which Items of Gross Income Included.  - The long-term contracts shall be repo1ied for tax purposes in the manner
amount of all items of gross income shall be included in the gross as provided in this Section.
income for the taxable year in which received by the taxpayer,
unless, under methods of accounting permitted under Section 43, As used herein, the term 'long-term contracts' means building,
any such amounts are to be properly accounted for as of a different installation or construction contracts covering a period in excess of
period. one (1) year.

In the case of the death of a taxpayer, there shall be included in Persons whose gross income is derived in whole or in part from such
computing taxable income for the taxable period in which falls the contracts shall report such income upon the basis of percentage of
date of his death, amounts accrued up to the date of his death if not completion. 1âwphi1

otherwise properly includible in respect of such period or a prior

period. The return should be accompanied by a return certificate of
architects or engineers showing the percentage of completion during
Sec. 45. Period/or which Deductions and Credits Taken. - The the taxable year of the entire work performed under contract.
deductions provided for in this Title shall be taken for the taxable
year in which 'paid or accrued'  or 'paid or incurred,'  dependent upon There should be deducted from such gross income all expenditures
the method of accounting upon the basis of which the net income is made during the taxable year on account of the contract, account
computed, unless in order to clearly reflect the income, the being taken of the material and supplies on hand at the beginning
deductions should be taken as of a different period. In the case of and end of the taxable period for use in connection with the work
the death of a taxpayer, there shall be allowed as deductions for the under the contract but not yet so applied.
taxable period in which falls the date of his death, amounts accrued
up to the date of his death if not otherwise properly allowable in
respect of such period or a prior period. If upon completion of a contract, it is found that the taxable net
income arising thereunder has not been clearly reflected for any year
or years, the Commissioner may permit or require an amended
return.

Sec. 49. Installment Basis. -

(A) Sales of Dealers in Personal Property. - Under rules and (D) Change from Accrual to Installment Basis. - If a taxpayer entitled
regulations prescribed by the Secretary of Finance, upon to the benefits of Subsection (A) elects for any taxable year to report
recommendation of the Commissioner, a person who regularly sells his taxable income on the installment basis, then in computing his
or otherwise disposes of personal property on the installment plan income for the year of change or any subsequent year, amounts
may return as income therefrom in any taxable year that proportion actually received during any such year on account of sales or other
of the installment payments actually received in that year, which the dispositions of property made in any prior year shall not be
gross profit realized or to be realized when payment is completed, excluded." (emphasis in the original)
bears to the total contract price.
We now proceed to the matter respecting the accounting method
(B) Sales of Realty and Casual Sales of Personality.  - In the case employed by Lancaster.
(1) of a casual sale or other casual disposition of personal property
(other than property of a kind which would properly be included in the An accounting method is a "set of rules for determining when and
inventory of the taxpayer if on hand at the close of the taxable year), how to report income and deductions."  The provisions under
46

for a price exceeding One thousand pesos (₱1,000), or (2) of a sale Chapter VIII, Title II of the NIRC cited above enumerate the methods
or other disposition of real prope1iy, if in either case the initial of accounting that the law expressly recognizes, to wit:
payments do not exceed twenty-five percent (25%) of the selling
price, the income may, under the rules and regulations prescribed by (1) Cash basis method; 47

the Secretary of Finance, upon recommendation of the

Commissioner, be returned on the basis and in the manner above
prescribed in this Section. (2) Accrual method; 48

As used in this Section, the term 'initial payments' means the (3) Installment method; 49

payments received in cash or property other than evidences of

indebtedness of the purchaser during the taxable period in which the (4) Percentage of completion method;  and
50

sale or other disposition is made.

(5) Other accounting methods.
(C) Sales of Real Property Considered as Capital Asset by
Individuals.  - An individual who sells or disposes of real property, Any of the foregoing methods may be employed by any taxpayer so
considered as capital asset, and is otherwise qualified to report the long as it reflects its income properly and such method is used
gain therefrom under Subsection (B) may pay the capital gains tax in regularly. The peculiarities of the business or occupation engaged in
installments under rules and regulations to be promulgated by the by a taxpayer would largely determine how it would report incomes
Secretary of Finance, upon recommendation of the Commissioner. and expenses in its accounting books or records. The NIRC does not
prescribe a uniform, or even specific, method of accounting.

Too, other methods approved by the CIR, even when not expressly
mentioned in the NIRC, may be adopted if such method would
enable the taxpayer to properly reflect its income. Section 43 of the
NIRC authorizes the CIR to allow the use of a method of accounting
that in its opinion would clearly reflect the income of the taxpayer. An
example of such method not expressly mentioned in the NIRC, but the parties, or even from their testimonies before the CT A, would
duly approved by the CIR, is the 'crop method of support a finding that the gross income from the crops (to which the
accounting' authorized under RAM No. 2-95. The pertinent subject expenses refer) was actually realized by the end of March
provision reads: 1998, or the closing of Lancaster's fiscal year for 1998. Instead, the
records show that the February and March 1998 purchases were
II. Accounting Methods recorded by Lancaster as advances  and later taken up
as purchases  by the close of the crop year in September 1998, or as
stated very clearly above, within the fiscal year 1999. On this point,
51

xxxx
we quote with approval the ruling of the CT A En Banc, thus:
F. Crop Year Basis is a method applicable only to farmers engaged
Considering that [Lancaster] is engaged in the production oftobacco,
in the production of crops which take more than a year from the time
it applied the crop year basis in determining its total purchases for
of planting to the process of gathering and disposal. Expenses paid
each fiscal year. Thus, [Lancaster's] total cost for the production of
or incurred are deductible in the year the gross income from the sale
its crops, which includes its purchases, must be taken as a deduction
of the crops are realized.
in the year in which the gross income is realized. Thus, We agree
with the following ratiocination of the First Division:
The crop method recognizes that the harvesting and selling of crops
do not fall within the same year that they are planted or grown. This
Evident from the foregoing, the crop year basis is one unusual
method is especially relevant to farmers, or those engaged in the
method of accounting wherein the entire cost of producing the crops
business of producing crops who, pursuant to RAM No. 2-95, would
(including purchases) must be taken as a deduction in the year in
then be able to compute their taxable income on the basis of their
which the gross income from the crop is realized. Since the
crop year. On when to recognize expenses as deductions against
petitioner's crop year starts in October and ends in September of the
income, the governing rule is found in the second sentence of
following year, the same does not coincide with petitioner's fiscal
Subsection F cited above. The rule enjoins the recognition of the
year which starts in April and ends in March of the following year.
expense (or the deduction of the cost) of crop production in the year
However, the law and regulations consider this peculiar situation and
that the crops are sold  (when income is realized).
allow the costs to be taken up at the time the gross income from the
crop is realized, as in the instant case.
In the present case, we find it wholly justifiable for Lancaster, as a
business engaged in the production and marketing of tobacco, to
[Lancaster's] fiscal period is from April 1, 1998 to March 31, 1999.
adopt the crop method of accounting. A taxpayer is authorized to
On the other hand, its crop year is from October 1, 1997 to
employ what it finds suitable for its purpose so long as it consistently
September 1, 1998. Accordingly, in applying the crop year method,
does so, and in this case, Lancaster does appear to have utilized the
all the purchases made by the respondent for October 1, 1997 to
method regularly for many decades already. Considering that the
September 1, 1998 should be deducted from the fiscal year ending
crop year of Lancaster starts from October up to September of the
March 31, 1999, since it is the time when the gross income from the
following year, it follows that all of its expenses in the crop production
crops is realized.
52

made within the crop year starting from October 1997 to September
1998, including the February and March 1998 purchases covered by
purchase invoice vouchers, are rightfully deductible for income tax The matching principle
purposes in the year when the gross income from the crops are
realized. Pertinently, nothing from the pleadings or memoranda of
Both petitioner CIR and respondent Lancaster, it must be noted, rely Methods to be Used by Taxpayers for Internal Revenue Tax
upon the concept of matching cost against revenue to buttress their Purposes" dated 12 April 2004, commands that where there is
55

respective theories. Also, both parties cite RAM 2-95 in referencing conflict between the provisions of the Tax Code (NIRC), including its
the crop method of accounting. implementing rules and regulations, on accounting methods and the
generally accepted accounting principles, the former shall prevail.
We are tasked to determine which view is legally sound. The relevant portion of RMC 22-04 reads:

In essence, the matching concept, which is one of the generally II. Provisions of the Tax Code Shall Prevail.
accepted accounting principles, directs that the expenses are to be
reported in the same period that related revenues are earned. It All returns required to be filed by the Tax Code shall be prepared
attempts to match revenue with expenses that helped earn it. always in conformity with the provisions of the Tax Code, and the
rules and regulations implementing said Tax Code. Taxability of
The CIR posits that Lancaster should not have recognized in FY income and deductibility of expenses shall be determined strictly in
1999 the purchases for February and March 1998.  Apparent from
53 accordance with the provisions of the Tax Code and the rules and
the reasoning of the CIR is that such expenses ought to have been regulations issued implementing said Tax Code. In case of
deducted in FY 1998, when they were supposed to be paid or difference between the provisions of the Tax Code and the rules and
incurred by Lancaster. In other words, the CIR is of the view that the regulations implementing the Tax Code, on one hand, and the
subject purchases match with revenues in 1998, not in 1999 general(v accepted accounting principles (GAAP) and the generally
accepted accounting standards (GAAS), on the other hand, the
provisions of the Tax Code and the rules and regulations issued
A reading of RAM No. 2-95, however, clearly evinces that it conforms
implementing said Tax Code shall prevail. (italics supplied)
with the concept that the expenses paid  or incurred  be deducted in
the year in which gross income from the sale of the crops
is realized. Put in another way, the expenses are matched with the RAM No. 2-95 is clear-cut on the rule on when to recognize
related incomes which are eventually earned. Nothing from the deductions for taxpayers using the crop method of accounting. The
provision is it strictly required that for the expense to be deductible, rule prevails over any GAAP, including the matching concept as
the income to which such expense is related to be realized in the applied in financial or business accounting.
same year that it is paid  or incurred. As noted by the CTA,  the crop
54

method is an unusual method of accounting, unlike other recognized In sum, and considering the foregoing premises, we find no cogent
accounting methods that, by mandate of Sec. 45 of the NIRC, strictly reason to overturn the assailed decision and resolution of the CT A.
require expenses be taken in the same taxable year when the As the CTA decreed, Assessment Notice LTAID II IT-98-00007,
income is 'paid or incurred,  ' or 'paid or accrued, ' depending upon dated 11 October 2002, in the amount of ₱6,466,065.50 for
the method of accounting employed by the taxpayer. deficiency income tax should be cancelled and set aside. The
assessment is void for being issued without valid authority.
Even if we were to accept the notion that applying the 1998 Furthermore, there is no legal justification for the disallowance of
purchases as deductions in the fiscal year 1998 conforms with the Lancaster's expenses for the purchase of tobacco in February and
generally accepted principle of matching cost against revenue, the March 1998.
same would still not lend any comfort to the CIR. Revenue
Memorandum Circular (RMC) No. 22-04, entitled "Supplement to
Revenue Memorandum Circular No. 44-2002 on Accounting
WHEREFORE, the petition is DENIED. The assailed 30 April 2008 SO ORDERED.
Decision and 24 June 2008 Resolution of the Court of Tax Appeals
En Banc are AFFIRMED. No cost

SECOND DIVISION furnished by another informer, the 1987 importations of the

respondent were understated in its accounting records.4 Amoto
G.R. No. 136975             March 31, 2005 submitted a report to the EIIB Commissioner recommending that an
inventory audit of the respondent be conducted by the Internal
Inquiry and Prosecution Office (IIPO) of the EIIB.5
COMMISSION OF INTERNAL REVENUE, Petitioner,
vs.
HANTEX TRADING CO., INC., respondent. Acting on the said report, Jose T. Almonte, then Commissioner of the
EIIB, issued Mission Order No. 398-896 dated November 14, 1989 for
the audit and investigation of the importations of Hantex for 1987.
DECISION
The IIPO issued subpoena duces tecum and ad testificandum for the
president and general manager of the respondent to appear in a
CALLEJO, SR., J.: hearing and bring the following:

Before us is a petition for review of the Decision1 of the Court of 1. Books of Accounts for the year 1987;
Appeals (CA) which reversed the Decision2 of the Court of Tax
Appeals (CTA) in CTA Case No. 5126, upholding the deficiency
2. Record of Importations of Synthetic Resin and Calcium
income and sales tax assessments against respondent Hantex
Carbonate for the year 1987;
Trading Co., Inc.

3. Income tax returns & attachments for 1987; and

The Antecedents

4. Record of tax payments.7

The respondent is a corporation duly organized and existing under
the laws of the Philippines. Being engaged in the sale of plastic
products, it imports synthetic resin and other chemicals for the However, the respondent’s president and general manager refused
manufacture of its products. For this purpose, it is required to file an to comply with the subpoena, contending that its books of accounts
Import Entry and Internal Revenue Declaration (Consumption Entry) and records of importation of synthetic resin and calcium bicarbonate
with the Bureau of Customs under Section 1301 of the Tariff and had been investigated repeatedly by the Bureau of Internal Revenue
Customs Code. (BIR) on prior occasions.8 The IIPO explained that despite such
previous investigations, the EIIB was still authorized to conduct an
investigation pursuant to Section 26-A of Executive Order No. 127.
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of
Still, the respondent refused to comply with the subpoena issued by
Counter-Intelligence Division of the Economic Intelligence and
the IIPO. The latter forthwith secured certified copies of the Profit
Investigation Bureau (EIIB), received confidential information that the
and Loss Statements for 1987 filed by the respondent with the
respondent had imported synthetic resin amounting
Securities and Exchange Commission (SEC).9 However, the IIPO
to P115,599,018.00 but only declared P45,538,694.57.3 According to
failed to secure certified copies of the respondent’s 1987
the informer, based on photocopies of 77 Consumption Entries
Consumption Entries from the Bureau of Customs since, according
to the custodian thereof, the original copies had been eaten by processed and released from the Port of Manila after payment of
termites.10 duties and taxes, to wit:

In a Letter dated June 28, 1990, the IIPO requested the Chief of the Hantex Trading Co., Inc.
Collection Division, Manila International Container Port, and the Entry No. Date Released Entry No. Date Released
Acting Chief of the Collection Division, Port of Manila, to authenticate
the machine copies of the import entries supplied by the informer. 3903 1/29/87 22869 4/8/87
However, Chief of the Collection Division Merlita D. Tomas could not 4414 1/20/87 19441 3/31/87
do so because the Collection Division did not have the original 10683 2/17/87 24189 4/21/87
copies of the entries. Instead, she wrote the IIPO that, as gleaned 12611 2/24/87 26431 4/20/87
from the records, the following entries had been duly processed and
released after the payment of duties and taxes: 12989 2/26/87 45478 7/3/87
17050 3/13/87 26796 4/23/87
IMPORTER – HANTEX TRADING CO., INC. – SERIES 17169 3/13/87 28827 4/30/87
OF 1987 18089 3/16/87 31617 5/14/87
ENTRY NO. DATE ENTRY NO. DATE 19439 4/1/87 39068 6/5/87
RELEASED RELEASED 21189 4/3/87 42581 6/21/87
03058-87 1/30/87 50265-87 12/9/87 43451 6/29/87 42793 6/23/87
09120-87 3/20/87 46427-87 11/27/87 42795 6/23/87 45477 7/3/87
18089-87 5/21/87 30764-87 8/21/87 35582 not received 85830 11/13/87
19439-87 6/2/87 30833-87 8/20/87 45691 7/3/87 86650 not received
19441-87 6/3/87 34690-87 9/16/87 46187 7/8/87 87647 11/18/87
11667-87 4/15/87 34722-87 9/11/87 46427 7/3/87 88829 11/23/87
23294-87 7/7/87 43234-87 11/2/87 57669 8/12/87 92293 12/3/87
45478-87 11/16/87 44850-87 11/16/87 62471 8/28/87 93292 12/7/87
45691-87 12/2/87 44851-87 11/16/87 63187 9/2/87 96357 12/16/87
25464-87 7/16/87 46461-87 11/19/87 66859 9/15/87 96822 12/15/87
26483-87 7/23/87 46467-87 11/18/87 67890 9/17/87 98823 not received
29950-87 8/11/87 48091-87 11-27-8711 68115 9/15/87 99428 12/28/87
69974 9/24/87 99429 12/28/87
Acting Chief of the Collection Division of the Bureau of Customs
72213 10/2/87 99441 12/28/87
Augusto S. Danganan could not authenticate the machine copies of
the import entries as well, since the original copies of the said entries 77688 10/16/87 101406 1/5/87
filed with the Bureau of Customs had apparently been eaten by 84253 11/10/87 101407 1/8/87
termites. However, he issued a certification that the following 85534 11/11/87 3118 1-19-8712
enumerated entries were filed by the respondent which were
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Meanwhile, as ordered by the Regional Director, Revenue
Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an Enforcement Officers Saturnino D. Torres and Wilson Filamor
investigation. They relied on the certified copies of the respondent’s conducted an investigation on the 1987 importations of the
Profit and Loss Statement for 1987 and 1988 on file with the SEC, respondent, in the light of the records elevated by the EIIB to the
the machine copies of the Consumption Entries, Series of 1987, BIR, inclusive of the photocopies of the Consumption Entries. They
submitted by the informer, as well as excerpts from the entries were to ascertain the respondent’s liability for deficiency sales and
certified by Tomas and Danganan. income taxes for 1987, if any. Per Torres’ and Filamor’s Report
dated March 6, 1991 which was based on the report of the EIIB and
Based on the documents/records on hand, inclusive of the machine the documents/records appended thereto, there was a prima
copies of the Consumption Entries, the EIIB found that for 1987, the facie case of fraud against the respondent in filing its 1987
respondent had importations totaling P105,716,527.00 (inclusive of Consumption Entry reports with the Bureau of Customs. They found
advance sales tax). Compared with the declared sales based on the that the respondent had unrecorded importation in the total amount
Profit and Loss Statements filed with the SEC, the respondent had of P70,661,694.00, and that the amount was not declared in its
unreported sales in the amount of P63,032,989.17, and its income tax return for 1987. The District Revenue Officer and the
corresponding income tax liability was P41,916,937.78, inclusive of Regional Director of the BIR concurred with the report.15
penalty charge and interests.
Based on the said report, the Acting Chief of the Special
EIIB Commissioner Almonte transmitted the entire docket of the case Investigation Branch wrote the respondent and invited its
to the BIR and recommended the collection of the total tax representative to a conference at 10:00 a.m. of March 14, 1991 to
assessment from the respondent.13 discuss its deficiency internal revenue taxes and to present whatever
documentary and other evidence to refute the same.16 Appended to
the letter was a computation of the deficiency income and sales tax
On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a
due from the respondent, inclusive of increments:
Memorandum to the BIR Assistant Commissioner for Special
Operations Service, directing the latter to prepare a conference letter
advising the respondent of its deficiency taxes.14 B. Computations:
1. Cost of Sales Ratio A2/A1 85.492923%
2. Undeclared Sales – A3/B1 110,079,491.61
Imported
3. Undeclared Gross Profit B2-A3 15,969,316.61
C. Deficiency Taxes Due:
1. Deficiency Income Tax B3 x 35% 5,589,261.00
50% Surcharge C1 x 50% 2,794,630.50
Interest to 2/28/91 C1 x 57.5% 3,213,825.08
Total 11,597,825.58
2. Deficiency Sales Tax
at 10% 7,290,082.72
at 20% 10,493,312.31
 Total Due 17,783,395.03 The petitioner, the Commissioner of Internal Revenue, through
Less: Advanced Sales Taxes 11,636,352.00 Assistant Commissioner for Collection Jaime M. Maza, sent a Letter
Paid dated April 15, 1991 to the respondent demanding payment of its
deficiency income tax of P13,414,226.40 and deficiency sales tax
Deficiency Sales Tax 6,147,043.03 of P14,752,903.25, inclusive of surcharge and interest.20 Appended
50% Surcharge C2 x 50% 3,073,521.52 thereto were the Assessment Notices of Tax Deficiency Nos. FAS-1-
Interest to 2/28/91 5,532,338.73 87-91-001654 and FAS-4-87-91-001655.21
Total 14,752,903.2817
On February 12, 1992, the Chief of the Accounts Receivables/Billing
Division of the BIR sent a letter to the respondent demanding
The invitation was reiterated in a Letter dated March 15, 1991. In his payment of its tax liability due for 1987 within ten (10) days from
Reply dated March 15, 1991, Mariano O. Chua, the President and notice, on pain of the collection tax due via a warrant of distraint and
General Manager of the respondent, requested that the report of levy and/or judicial action.22 The Warrant of Distraint and/or
Torres and Filamor be set aside on the following claim: Levy23 was actually served on the respondent on January 21, 1992.
On September 7, 1992, it wrote the Commissioner of Internal
… [W]e had already been investigated by RDO No. 23 under Revenue protesting the assessment on the following grounds:
Letters of Authority Nos. 0322988 RR dated Oct. 1, 1987,
0393561 RR dated Aug. 17, 1988 and 0347838 RR dated I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL
March 2, 1988, and re-investigated by the Special AS LEGAL BASIS, THE FACT THAT NO INVESTIGATION
Investigation Team on Aug. 17, 1988 under Letter of OF OUR RECORDS WAS EVER MADE BY THE EIIB
Authority No. 0357464 RR, and the Intelligence and WHICH RECOMMENDED ITS ISSUANCE.24
Investigation Office on Sept. 27, 1988 under Letter of
Authority No. 0020188 NA, all for income and business tax
liabilities for 1987. The Economic Intelligence and II. THAT GRANTING BUT WITHOUT ADMITTING THAT
Investigation Bureau on Nov. 20, 1989, likewise, confronted OUR PURCHASES FOR 1987 AMOUNTED
us on the same information for the same year. TO P105,716,527.00 AS CLAIMED BY THE EIIB, THE
ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL
DEFECTIVE FOR IT FAILED TO CONSIDER OUR REAL
In all of these investigations, save your request for an PURCHASES OF P45,538,694.57.25
informal conference, we welcomed them and proved the
contrary of the allegation. Now, with your new inquiry, we
think that there will be no end to the problem. III. THAT THE ASSESSMENT OF A DEFICIENCY SALES
TAX IS ALSO BASELESS AND UNFOUNDED
CONSIDERING THAT WE HAVE DUTIFULLY PAID THE
Madam, we had been subjected to so many investigations SALES TAX DUE FROM OUR BUSINESS.26
and re-investigations for 1987 and nothing came out except
the payment of deficiency taxes as a result of oversight. Tax
evasion through underdeclaration of income had never been In view of the impasse, administrative hearings were conducted on
proven.18 the respondent’s protest to the assessment. During the hearing of
August 20, 1993, the IIPO representative presented the photocopies
of the Consumption and Import Entries and the Certifications issued
Invoking Section 23519 of the 1977 National Internal Revenue Code by Tomas and Danganan of the Bureau of Customs. The IIPO
(NIRC), as amended, Chua requested that the inquiry be set aside.
representative testified that the Bureau of Customs failed to furnish as evidence in this hearing, because all the issues on the tax
the EIIB with certified copies of the Consumption and Import Entries; assessments in question have already been raised by the
hence, the EIIB relied on the machine copies from their informer.27 herein taxpayer.29

The respondent wrote the BIR Commissioner on July 12, 1993 The respondent requested anew that the income tax deficiency
questioning the assessment on the ground that the EIIB assessment and the sales tax deficiency assessment be set aside
representative failed to present the original, or authenticated, or duly for lack of factual and legal basis.
certified copies of the Consumption and Import Entry Accounts, or
excerpts thereof if the original copies were not readily available; or, if The BIR Commissioner30 wrote the respondent on December 10,
the originals were in the official custody of a public officer, certified 1993, denying its letter-request for the dismissal of the
copies thereof as provided for in Section 12, Chapter 3, Book VII, assessments.31 The BIR Commissioner admitted, in the said letter,
Administrative Procedure, Administrative Order of 1987. It stated that the possibility that the figures appearing in the photocopies of the
the only copies of the Consumption Entries submitted to the Hearing Consumption Entries had been tampered with. She averred,
Officer were mere machine copies furnished by an informer of the however, that she was not proscribed from relying on other
EIIB. It asserted that the letters of Tomas and Danganan were admissible evidence, namely, the Letters of Torres and Filamor
unreliable because of the following: dated August 7 and 22, 1990 on their investigation of the
respondent’s tax liability. The Commissioner emphasized that her
In the said letters, the two collection officers merely decision was final.32
submitted a listing of alleged import entry numbers and
dates released of alleged importations by Hantex Trading The respondent forthwith filed a petition for review in the CTA of the
Co., Inc. of merchandise in 1987, for which they certified that Commissioner’s Final Assessment Letter dated December 10, 1993
the corresponding duties and taxes were paid after being on the following grounds:
processed in their offices. In said letters, no amounts of the
landed costs and advance sales tax and duties were stated,
and no particulars of the duties and taxes paid per import
entry document was presented.

The contents of the two letters failed to indicate the

particulars of the importations per entry number, and the
said letters do not constitute as evidence of the amounts of
importations of Hantex Trading Co., Inc. in 1987.28

The respondent cited the following findings of the Hearing Officer:

… [T]hat the import entry documents do not constitute

evidence only indicate that the tax assessments in question
have no factual basis, and must, at this point in time, be
withdrawn and cancelled. Any new findings by the IIPO
representative who attended the hearing could not be used
First. The alleged 1987 deficiency income tax assessment (including The Commissioner did not adduce in evidence the original or
increments) and the alleged 1987 deficiency sales tax assessment certified true copies of the 1987 Consumption Entries on file with the
(including increments) are void ab initio, since under Sections 16(a) Commission on Audit. Instead, she offered in evidence as proof of
and 49(b) of the Tax Code, the Commissioner shall examine a return the contents thereof, the photocopies of the Consumption Entries
after it is filed and, thereafter, assess the correct amount of tax. The which the respondent objected to for being inadmissible in
following facts obtaining in this case, however, are indicative of the evidence.34 She also failed to present any witness to prove the
incorrectness of the tax assessments in question: the deficiency correct amount of tax due from it. Nevertheless, the CTA
interests imposed in the income and percentage tax deficiency provisionally admitted the said documents in evidence, subject to its
assessment notices were computed in violation of the provisions of final evaluation of their relevancy and probative weight to the issues
Section 249(b) of the NIRC of 1977, as amended; the percentage tax involved.35
deficiency was computed on an annual basis for the year 1987 in
accordance with the provision of Section 193, which should have On December 11, 1997, the CTA rendered a decision, the dispositive
been computed in accordance with Section 162 of the 1977 NIRC, portion of which reads:
as amended by Pres. Decree No. 1994 on a quarterly basis; and the
BIR official who signed the deficiency tax assessments was the IN THE LIGHT OF ALL THE FOREGOING, judgment is
Assistant Commissioner for Collection, who had no authority to sign hereby rendered DENYING the herein petition. Petitioner is
the same under the NIRC. hereby ORDERED TO PAY the respondent Commissioner
of Internal Revenue its deficiency income and sales taxes for
Second. Even granting arguendo that the deficiency taxes and the year 1987 in the amounts of P11,182,350.26
increments for 1987 against the respondent were correctly computed and P12,660,382.46, respectively, plus 20% delinquency
in accordance with the provisions of the Tax Code, the facts indicate interest per annum on both deficiency taxes from April 15,
that the above-stated assessments were based on alleged 1991 until fully paid pursuant to Section 283(c)(3) of the
documents which are inadmissible in either administrative or judicial 1987 Tax Code, with costs against the petitioner.
proceedings. Moreover, the alleged bases of the tax computations
were anchored on mere presumptions and not on actual facts. The SO ORDERED.36
alleged undeclared purchases for 1987 were based on mere
photocopies of alleged import entry documents, not the original ones,
and which had never been duly certified by the public officer charged The CTA ruled that the respondent was burdened to prove not only
with the custody of such records in the Bureau of Customs. that the assessment was erroneous, but also to adduce the correct
According to the respondent, the alleged undeclared sales were taxes to be paid by it. The CTA declared that the respondent failed to
computed based on mere presumptions as to the alleged gross profit prove the correct amount of taxes due to the BIR. It also ruled that
contained in its 1987 financial statement. Moreover, even the alleged the respondent was burdened to adduce in evidence a certification
financial statement of the respondent was a mere machine copy and from the Bureau of Customs that the Consumption Entries in
not an official copy of the 1987 income and business tax returns. question did not belong to it.
Finally, the respondent was following the accrual method of
accounting in 1987, yet, the BIR investigator who computed the 1987 On appeal, the CA granted the petition and reversed the decision of
income tax deficiency failed to allow as a deductible item the alleged the CTA. The dispositive portion of the decision reads:
sales tax deficiency for 1987 as provided for under Section 30(c) of
the NIRC of 1986.33 FOREGOING PREMISES CONSIDERED, the Petition for
Review is GRANTED and the December 11, 1997 decision
 of the CTA in CTA Case No. 5162 affirming the 1987 Finally, the CA noted that the tax deficiency assessments were
deficiency income and sales tax assessments and the computed without the tax returns. The CA opined that the use of the
increments thereof, issued by the BIR is hereby tax returns is indispensable in the computation of a tax deficiency;
REVERSED. No costs.37 hence, this essential requirement must be complied with in the
preparation and issuance of valid tax deficiency assessments.42
The Ruling of the Court of Appeals
The Present Petition
The CA held that the income and sales tax deficiency assessments
issued by the petitioner were unlawful and baseless since the copies The Commissioner of Internal Revenue, the petitioner herein, filed
of the import entries relied upon in computing the deficiency tax of the present petition for review under Rule 45 of the Rules of Court for
the respondent were not duly authenticated by the public officer the reversal of the decision of the CA and for the reinstatement of the
charged with their custody, nor verified under oath by the EIIB and ruling of the CTA.
the BIR investigators.38 The CA also noted that the public officer
charged with the custody of the import entries was never presented As gleaned from the pleadings of the parties, the threshold issues for
in court to lend credence to the alleged loss of the originals.39 The CA resolution are the following: (a) whether the petition at bench is
pointed out that an import entry is a public document which falls proper and complies with Sections 4 and 5, Rule 7 of the Rules of
within the provisions of Section 19, Rule 132 of the Rules of Court, Court; (b) whether the December 10, 1991 final assessment of the
and to be admissible for any legal purpose, Section 24, Rule 132 of petitioner against the respondent for deficiency income tax and sales
the Rules of Court should apply.40 Citing the ruling of this Court tax for the latter’s 1987 importation of resins and calcium bicarbonate
in Collector of Internal Revenue v. Benipayo,41 the CA ruled that the is based on competent evidence and the law; and (c) the total
assessments were unlawful because they were based on hearsay amount of deficiency taxes due from the respondent for 1987, if any.
evidence. The CA also ruled that the respondent was deprived of its
right to due process of law. On the first issue, the respondent points out that the petition raises
both questions of facts and law which cannot be the subject of an
The CA added that the CTA should not have just brushed aside the appeal by certiorari under Rule 45 of the Rules of Court. The
legal requisites provided for under the pertinent provisions of the respondent notes that the petition is defective because the
Rules of Court in the matter of the admissibility of public documents, verification and the certification against forum shopping were not
considering that substantive rules of evidence should not be signed by the petitioner herself, but only by the Regional Director of
disregarded. It also ruled that the certifications made by the two the BIR. The respondent submits that the petitioner should have filed
Customs Collection Chiefs under the guise of supporting the a motion for reconsideration with the CA before filing the instant
respondent’s alleged tax deficiency assessments invoking the best petition for review.43
evidence obtainable rule under the Tax Code should not be
permitted to supplant the best evidence rule under Section 7, Rule We find and so rule that the petition is sufficient in form. A verification
130 of the Rules of Court. and certification against forum shopping signed by the Regional
Director constitutes sufficient compliance with the requirements of
Sections 4 and 5, Rule 7 of the Rules of Court. Under Section 10 of
the NIRC of 1997,44 the Regional Director has the power to
administer and enforce internal revenue laws, rules and regulations,
including the assessment and collection of all internal revenue taxes,
charges and fees. Such power is broad enough to vest the Revenue exceptional circumstances, the Court may take cognizance thereof
Regional Director with the authority to sign the verification and and resolve questions of fact. In this case, the findings and
certification against forum shopping in behalf of the Commissioner of conclusion of the CA are inconsistent with those of the CTA, not to
Internal Revenue. There is no other person in a better position to mention those of the Commissioner of Internal Revenue. The issues
know the collection cases filed under his jurisdiction than the raised in this case relate to the propriety and the correctness of the
Revenue Regional Director. tax assessments made by the petitioner against the respondent, as
well as the propriety of the application of Section 16, paragraph (b) of
Moreover, under Revenue Administrative Order No. 5-83,45 the the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773, 1994
Regional Director is authorized to sign all pleadings filed in and Executive Order No. 273, in relation to Section 3, Rule 132 of
connection with cases referred to the Revenue Regions by the the Rules of Evidence. There is also an imperative need for the
National Office which, otherwise, require the signature of the Court to resolve the threshold factual issues to give justice to the
petitioner. parties, and to determine whether the CA capriciously ignored,
misunderstood or misinterpreted cogent facts and circumstances
which, if considered, would change the outcome of the case.
We do not agree with the contention of the respondent that a motion
for reconsideration ought to have been filed before the filing of the
instant petition. A motion for reconsideration of the decision of the On the second issue, the petitioner asserts that since the respondent
CA is not a condition sine qua non for the filing of a petition for refused to cooperate and show its 1987 books of account and other
review under Rule 45. As we held in Almora v. Court of Appeals:46 accounting records, it was proper for her to resort to the best
evidence obtainable – the photocopies of the import entries in the
Bureau of Customs and the respondent’s financial statement filed
Rule 45, Sec. 1 of the Rules of Court, however, distinctly
with the SEC.48 The petitioner maintains that these import entries
provides that:
were admissible as secondary evidence under the best evidence
obtainable rule, since they were duly authenticated by the Bureau of
A party may appeal by certiorari from a judgment of Customs officials who processed the documents and released the
the Court of Appeals, by filing with the Supreme cargoes after payment of the duties and taxes due.49 Further, the
Court a petition for certiorari within fifteen (15) days petitioner points out that under the best evidence obtainable rule, the
from notice of judgment, or of the denial of his tax return is not important in computing the tax deficiency.50
motion for reconsideration filed in due time.
(Emphasis supplied)
The petitioner avers that the best evidence obtainable rule under
Section 16 of the 1977 NIRC, as amended, legally cannot be
The conjunctive "or" clearly indicates that the 15-day equated to the best evidence rule under the Rules of Court; nor can
reglementary period for the filing of a petition for certiorari the best evidence rule, being procedural law, be made strictly
under Rule 45 commences either from notice of the operative in the interpretation of the best evidence obtainable rule
questioned judgment or from notice of denial of the which is substantive in character.51 The petitioner posits that the CTA
appellant’s motion for reconsideration. A prior motion for is not strictly bound by technical rules of evidence, the reason being
reconsideration is not indispensable for a petition for review that the quantum of evidence required in the said court is merely
on certiorari under Rule 45 to prosper. …47 substantial evidence.52

While Rule 45 of the Rules of Court provides that only questions of Finally, the petitioner avers that the respondent has the burden of
law may be raised by the petitioner and resolved by the Court, under proof to show the correct assessments; otherwise, the presumption
in favor of the correctness of the assessments made by it The respondent argues that it was not necessary for it to show the
stands.53 Since the respondent was allowed to explain its side, there correct assessment, considering that it is questioning the
was no violation of due process.54 assessments not only because they are erroneous, but because they
were issued without factual basis and in patent violation of the
The respondent, for its part, maintains that the resort to the best assessment procedures laid down in the NIRC of 1977, as
evidence obtainable method was illegal. In the first place, the amended.61 It is also pointed out that the petitioner failed to use the
respondent argues, the EIIB agents are not duly authorized to tax returns filed by the respondent in computing the deficiency taxes
undertake examination of the taxpayer’s accounting records for which is contrary to law;62 as such, the deficiency assessments
internal revenue tax purposes. Hence, the respondent’s failure to constituted deprivation of property without due process of law.63
accede to their demands to show its books of accounts and other
accounting records cannot justify resort to the use of the best Central to the second issue is Section 16 of the NIRC of 1977, as
evidence obtainable method.55 Secondly, when a taxpayer fails to amended,64 which provides that the Commissioner of Internal
submit its tax records upon demand by the BIR officer, the remedy is Revenue has the power to make assessments and prescribe
not to assess him and resort to the best evidence obtainable rule, but additional requirements for tax administration and enforcement.
to punish the taxpayer according to the provisions of the Tax Code.56 Among such powers are those provided in paragraph (b) thereof,
which we quote:
In any case, the respondent argues that the photocopies of import
entries cannot be used in making the assessment because they (b) Failure to submit required returns, statements, reports
were not properly authenticated, pursuant to the provisions of and other documents. – When a report required by law as a
Sections 2457 and 2558 of Rule 132 of the Rules of Court. It avers that basis for the assessment of any national internal revenue tax
while the CTA is not bound by the technical rules of evidence, it is shall not be forthcoming within the time fixed by law or
bound by substantial rules.59 The respondent points out that the regulation or when there is reason to believe that any such
petitioner did not even secure a certification of the fact of loss of the report is false, incomplete or erroneous, the Commissioner
original documents from the custodian of the import entries. It simply shall assess the proper tax on the best evidence obtainable.
relied on the report of the EIIB agents that the import entry
documents were no longer available because they were eaten by In case a person fails to file a required return or other
termites. The respondent posits that the two collectors of the Bureau document at the time prescribed by law, or willfully or
of Customs never authenticated the xerox copies of the import otherwise files a false or fraudulent return or other
entries; instead, they only issued certifications stating therein the document, the Commissioner shall make or amend the
import entry numbers which were processed by their office and the return from his own knowledge and from such information as
date the same were released.60 he can obtain through testimony or otherwise, which shall be
prima facie correct and sufficient for all legal purposes. 65

This provision applies when the Commissioner of Internal Revenue

undertakes to perform her administrative duty of assessing the
proper tax against a taxpayer, to make a return in case of a
taxpayer’s failure to file one, or to amend a return already filed in the
BIR.
The petitioner may avail herself of the best evidence or other The law allows the BIR access to all relevant or material records and
information or testimony by exercising her power or authority under data in the person of the taxpayer. It places no limit or condition on
paragraphs (1) to (4) of Section 7 of the NIRC: the type or form of the medium by which the record subject to the
order of the BIR is kept. The purpose of the law is to enable the BIR
(1) To examine any book, paper, record or other data which to get at the taxpayer’s records in whatever form they may be kept.
may be relevant or material to such inquiry; Such records include computer tapes of the said records prepared
by the taxpayer in the course of business.68 In this era of developing
information-storage technology, there is no valid reason to immunize
(2) To obtain information from any office or officer of the
companies with computer-based, record-keeping capabilities from
national and local governments, government agencies or its
BIR scrutiny. The standard is not the form of the record but where it
instrumentalities, including the Central Bank of the
might shed light on the accuracy of the taxpayer’s return.
Philippines and government owned or controlled
corporations;
In Campbell, Jr. v. Guetersloh,69 the United States (U.S.) Court of
Appeals (5th Circuit) declared that it is the duty of the Commissioner
(3) To summon the person liable for tax or required to file a
of Internal Revenue to investigate any circumstance which led him to
return, or any officer or employee of such person, or any
believe that the taxpayer had taxable income larger than reported.
person having possession, custody, or care of the books of
Necessarily, this inquiry would have to be outside of the books
accounts and other accounting records containing entries
because they supported the return as filed. He may take the sworn
relating to the business of the person liable for tax, or any
testimony of the taxpayer; he may take the testimony of third parties;
other person, to appear before the Commissioner or his duly
he may examine and subpoena, if necessary, traders’ and brokers’
authorized representative at a time and place specified in the
accounts and books and the taxpayer’s book accounts. The
summons and to produce such books, papers, records, or
Commissioner is not bound to follow any set of patterns. The
other data, and to give testimony;
existence of unreported income may be shown by any practicable
proof that is available in the circumstances of the particular situation.
(4) To take such testimony of the person concerned, under Citing its ruling in Kenney v. Commissioner,70 the U.S. appellate court
oath, as may be relevant or material to such inquiry; …66 declared that where the records of the taxpayer are manifestly
inaccurate and incomplete, the Commissioner may look to other
The "best evidence" envisaged in Section 16 of the 1977 NIRC, as sources of information to establish income made by the taxpayer
amended, includes the corporate and accounting records of the during the years in question.71
taxpayer who is the subject of the assessment process, the
accounting records of other taxpayers engaged in the same line of We agree with the contention of the petitioner that the best evidence
business, including their gross profit and net profit sales.67 Such obtainable may consist of hearsay evidence, such as the testimony
evidence also includes data, record, paper, document or any of third parties or accounts or other records of other taxpayers
evidence gathered by internal revenue officers from other taxpayers similarly circumstanced as the taxpayer subject of the investigation,
who had personal transactions or from whom the subject taxpayer hence, inadmissible in a regular proceeding in the regular
received any income; and record, data, document and information courts.72 Moreover, the general rule is that administrative agencies
secured from government offices or agencies, such as the SEC, the such as the BIR are not bound by the technical rules of evidence. It
Central Bank of the Philippines, the Bureau of Customs, and the can accept documents which cannot be admitted in a judicial
Tariff and Customs Commission. proceeding where the Rules of Court are strictly observed. It can
choose to give weight or disregard such evidence, depending on its and final assessments against the respondent, even ignored the
trustworthiness. records on the investigation made by the District Revenue officers on
the respondent’s importations for 1987.
However, the best evidence obtainable under Section 16 of the 1977
NIRC, as amended, does not include mere photocopies of The original copies of the Consumption Entries were of prime
records/documents. The petitioner, in making a preliminary and final importance to the BIR. This is so because such entries are under
tax deficiency assessment against a taxpayer, cannot anchor the oath and are presumed to be true and correct under penalty of
said assessment on mere machine copies of records/documents. falsification or perjury. Admissions in the said entries of the
Mere photocopies of the Consumption Entries have no probative importers’ documents are admissions against interest and
weight if offered as proof of the contents thereof. The reason for this presumptively correct.77
is that such copies are mere scraps of paper and are of no probative
value as basis for any deficiency income or business taxes against a In fine, then, the petitioner acted arbitrarily and capriciously in relying
taxpayer. Indeed, in United States v. Davey,73 the U.S. Court of on and giving weight to the machine copies of the Consumption
Appeals (2nd Circuit) ruled that where the accuracy of a taxpayer’s Entries in fixing the tax deficiency assessments against the
return is being checked, the government is entitled to use the original respondent.
records rather than be forced to accept purported copies which
present the risk of error or tampering.74 The rule is that in the absence of the accounting records of a
taxpayer, his tax liability may be determined by estimation. The
In Collector of Internal Revenue v. Benipayo,75 the Court ruled that petitioner is not required to compute such tax liabilities with
the assessment must be based on actual facts. The rule assumes mathematical exactness. Approximation in the calculation of the
more importance in this case since the xerox copies of the taxes due is justified. To hold otherwise would be tantamount to
Consumption Entries furnished by the informer of the EIIB were holding that skillful concealment is an invincible barrier to
furnished by yet another informer. While the EIIB tried to secure proof.78 However, the rule does not apply where the estimation is
certified copies of the said entries from the Bureau of Customs, it arrived at arbitrarily and capriciously.79
was unable to do so because the said entries were allegedly eaten
by termites. The Court can only surmise why the EIIB or the BIR, for We agree with the contention of the petitioner that, as a general rule,
that matter, failed to secure certified copies of the said entries from tax assessments by tax examiners are presumed correct and made
the Tariff and Customs Commission or from the National Statistics in good faith. All presumptions are in favor of the correctness of a tax
Office which also had copies thereof. It bears stressing that under assessment. It is to be presumed, however, that such assessment
Section 1306 of the Tariff and Customs Code, the Consumption was based on sufficient evidence. Upon the introduction of the
Entries shall be the required number of copies as prescribed by assessment in evidence, a prima facie case of liability on the part of
regulations.76 The Consumption Entry is accomplished in sextuplicate the taxpayer is made.80 If a taxpayer files a petition for review in the
copies and quadruplicate copies in other places. In Manila, the six CTA and assails the assessment, the prima facie presumption is that
copies are distributed to the Bureau of Customs, the Tariff and the assessment made by the BIR is correct, and that in preparing the
Customs Commission, the Declarant (Importer), the Terminal same, the BIR personnel regularly performed their duties. This rule
Operator, and the Bureau of Internal Revenue. Inexplicably, the for tax initiated suits is premised on several factors other than the
Commissioner and the BIR personnel ignored the copy of the normal evidentiary rule imposing proof obligation on the petitioner-
Consumption Entries filed with the BIR and relied on the photocopies taxpayer: the presumption of administrative regularity; the likelihood
supplied by the informer of the EIIB who secured the same from that the taxpayer will have access to the relevant information; and
another informer. The BIR, in preparing and issuing its preliminary
the desirability of bolstering the record-keeping requirements of the any other agencies, attesting to the fact that those
NIRC.81 consumption entries did not really belong to them.

However, the prima facie correctness of a tax assessment does not The burden of proof is on the taxpayer contesting the validity
apply upon proof that an assessment is utterly without foundation, or correctness of an assessment to prove not only that the
meaning it is arbitrary and capricious. Where the BIR has come out Commissioner of Internal Revenue is wrong but the taxpayer
with a "naked assessment," i.e., without any foundation character, is right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the
the determination of the tax due is without rational basis.82 In such a presumption in favor of the correctness of tax assessment
situation, the U.S. Court of Appeals ruled83 that the determination of stands (Sy Po v. CTA, 164 SCRA 524). The burden of
the Commissioner contained in a deficiency notice proving the illegality of the assessment lies upon the
disappears. Hence, the determination by the CTA must rest on all petitioner alleging it to be so. In the case at bar, petitioner
the evidence introduced and its ultimate determination must find miserably failed to discharge this duty.84
support in credible evidence.
We are not in full accord with the findings and ratiocination of the
The issue that now comes to fore is whether the tax deficiency CTA. Based on the letter of the petitioner to the respondent dated
assessment against the respondent based on the certified copies of December 10, 1993, the tax deficiency assessment in question was
the Profit and Loss Statement submitted by the respondent to the based on (a) the findings of the agents of the EIIB which was based,
SEC in 1987 and 1988, as well as certifications of Tomas and in turn, on the photocopies of the Consumption Entries; (b) the Profit
Danganan, is arbitrary, capricious and illegal. The CTA ruled that the and Loss Statements of the respondent for 1987 and 1988; and (c)
respondent failed to overcome the prima facie correctness of the tax the certifications of Tomas and Danganan dated August 7, 1990 and
deficiency assessment issued by the petitioner, to wit: August 22, 1990:

The issue should be ruled in the affirmative as petitioner has In reply, please be informed that after a thorough evaluation
failed to rebut the validity or correctness of the of the attending facts, as well as the laws and jurisprudence
aforementioned tax assessments. It is incongruous for involved, this Office holds that you are liable to the assessed
petitioner to prove its cause by simply drawing an inference deficiency taxes. The conclusion was arrived at based on the
unfavorable to the respondent by attacking the source findings of agents of the Economic Intelligence &
documents (Consumption Entries) which were the bases of Investigation Bureau (EIIB) and of our own examiners who
the assessment and which were certified by the Chiefs of the have painstakingly examined the records furnished by the
Collection Division, Manila International Container Port and Bureau of Customs and the Securities & Exchange
the Port of Manila, as having been processed and released Commission (SEC). The examination conducted disclosed
in the name of the petitioner after payment of duties and that while your actual sales for 1987 amounted
taxes and the duly certified copies of Financial Statements to P110,731,559.00, you declared for taxation purposes, as
secured from the Securities and Exchange Commission. Any shown in the Profit and Loss Statements, the sum
such inference cannot operate to relieve petitioner from of P47,698,569.83 only. The difference, therefore,
bearing its burden of proof and this Court has no warrant of of P63,032,989.17 constitutes as undeclared or unrecorded
absolution. The Court should have been persuaded to grant sales which must be subjected to the income and sales
the reliefs sought by the petitioner should it have presented taxes.
any evidence of relevance and competence required, like
that of a certification from the Bureau of Customs or from
 You also argued that our assessment has no basis since the the Bureau of Customs, marked Annexes "F-1" to "F-68."
alleged amount of underdeclared importations were lifted The total cost of importations is the sum of the Landed Costs
from uncertified or unauthenticated xerox copies of and the Advance Sales Tax as shown in the annexed
consumption entries which are not admissible in evidence. entries. These entries were duly authenticated as having
On this issue, it must be considered that in letters dated been processed and released, after payment of the duties
August 7 and 22, 1990, the Chief and Acting Chief of the and taxes due thereon, by the Chief, Collection Division,
Collection Division of the Manila International Container Port Manila International Container Port, dated August 7, 1990,
and Port of Manila, respectively, certified that the "Annex-G," and the Port of Manila, dated August 22, 1990,
enumerated consumption entries were filed, processed and "Annex-H." So, it was established that subject-importations,
released from the port after payment of duties and taxes. It is mostly resins, really belong to HANTEX TRADING CO.,
noted that the certification does not touch on the INC.86
genuineness, authenticity and correctness of the
consumption entries which are all xerox copies, wherein the It also appears on the worksheet of the IIPO, as culled from the
figures therein appearing may have been tampered which photocopies of the Consumption Entries from its informer, that the
may render said documents inadmissible in evidence, but for total cost of the respondent’s importation for 1987
tax purposes, it has been held that the Commissioner is not was P105,761,527.00. Per the report of Torres and Filamor, they
required to make his determination (assessment) on the also relied on the photocopies of the said Consumption Entries:
basis of evidence legally admissible in a formal proceeding
in Court (Mertens, Vol. 9, p. 214, citing Cohen v. The importations made by taxpayer verified by us from the
Commissioner). A statutory notice may be based in whole or records of the Bureau of Customs and xerox copies of which
in part upon admissible evidence (Llorente v. Commissioner, are hereto attached shows the big volume of importations
74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC made and not declared in the income tax return filed by
672 (1977); and Rosano v. Commissioner, 46 TC 681 taxpayer.
(1966). In the case also of Weimerskirch v.
Commissioner (1977), the assessment was given due
course in the presence of admissible evidence as to how the Based on the above findings, it clearly shows that a prima
Commissioner arrived at his determination, although there facie case of fraud exists in the herein transaction of the
was no admissible evidence with respect to the substantial taxpayer, as a consequence of which, said transaction has
issue of whether the taxpayer had unreported or undeclared not been possibly entered into the books of accounts of the
income from narcotics sale. …85 subject taxpayer.87

Based on a Memorandum dated October 23, 1990 of the IIPO, the In fine, the petitioner based her finding that the 1987 importation of
source documents for the actual cost of importation of the the respondent was underdeclared in the amount
respondent are the machine copies of the Consumption Entries from of P105,761,527.00 on the worthless machine copies of the
the informer which the IIPO claimed to have been certified by Tomas Consumption Entries. Aside from such copies, the petitioner has no
and Danganan: other evidence to prove that the respondent imported goods
costing P105,761,527.00. The petitioner cannot find solace on the
certifications of Tomas and Danganan because they did not
The source documents for the total actual cost of authenticate the machine copies of the Consumption Entries, and
importations, abovementioned, were the different copies of merely indicated therein the entry numbers of Consumption Entries
Consumption Entries, Series of 1987, filed by subject with
and the dates when the Bureau of Customs released the same. The neglected to perform their duties as mandated by law; neither is
certifications of Tomas and Danganan do not even contain the there evidence aliunde that the contents of the 1987 and 1988 Profit
landed costs and the advance sales taxes paid by the importer, if and Loss Statements submitted by the respondent with the SEC are
any. Comparing the certifications of Tomas and Danganan and the incorrect.
machine copies of the Consumption Entries, only 36 of the entry
numbers of such copies are included in the said certifications; the Admittedly, the respondent did not adduce evidence to prove its
entry numbers of the rest of the machine copies of the Consumption correct tax liability. However, considering that it has been established
Entries are not found therein. that the petitioner’s assessment is barren of factual basis, arbitrary
and illegal, such failure on the part of the respondent cannot serve
Even if the Court would concede to the petitioner’s contention that as a basis for a finding by the Court that it is liable for the amount
the certification of Tomas and Danganan authenticated the machine contained in the said assessment; otherwise, the Court would
copies of the Consumption Entries referred to in the certification, it thereby be committing a travesty.
appears that the total cost of importations inclusive of advance sales
tax is only P64,324,953.00 – far from the amount On the disposition of the case, the Court has two options, namely, to
of P105,716,527.00 arrived at by the EIIB and the BIR,88 or even the deny the petition for lack of merit and affirm the decision of the CA,
amount of P110,079,491.61 arrived at by Deputy Commissioner without prejudice to the petitioner’s issuance of a new assessment
Deoferio, Jr.89 As gleaned from the certifications of Tomas and against the respondent based on credible evidence; or, to remand
Danganan, the goods covered by the Consumption Entries were the case to the CTA for further proceedings, to enable the petitioner
released by the Bureau of Customs, from which it can be presumed to adduce in evidence certified true copies or duplicate original
that the respondent must have paid the taxes due on the said copies of the Consumption Entries for the respondent’s 1987
importation. The petitioner did not adduce any documentary importations, if there be any, and the correct tax deficiency
evidence to prove otherwise. assessment thereon, without prejudice to the right of the respondent
to adduce controverting evidence, so that the matter may be
Thus, the computations of the EIIB and the BIR on the quantity and resolved once and for all by the CTA. In the higher interest of justice
costs of the importations of the respondent in the amount to both the parties, the Court has chosen the latter option. After all,
of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary as the Tax Court of the United States emphasized in Harbin v.
and capricious. The petitioner cannot rely on the presumption that Commissioner of Internal Revenue,91 taxation is not only practical; it
she and the other employees of the BIR had regularly performed is vital. The obligation of good faith and fair dealing in carrying out its
their duties. As the Court held in Collector of Internal Revenue v. provision is reciprocal and, as the government should never be over-
Benipayo,90 in order to stand judicial scrutiny, the assessment must reaching or tyrannical, neither should a taxpayer be permitted to
be based on facts. The presumption of the correctness of an escape payment by the concealment of material facts.
assessment, being a mere presumption, cannot be made to rest on
another presumption. IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED.
The Decision of the Court of Appeals is SET ASIDE. The records are
Moreover, the uncontroverted fact is that the BIR District Revenue REMANDED to the Court of Tax Appeals for further proceedings,
Office had repeatedly examined the 1987 books of accounts of the conformably with the decision of this Court. No costs.
respondent showing its importations, and found that the latter had
minimal business tax liability. In this case, the presumption that the SO ORDERED.
District Revenue officers performed their duties in accordance with
law shall apply. There is no evidence on record that the said officers
 Republic of the Philippines This petition for review on certiorari under Rule 45 of the Rules of
SUPREME COURT Court filed by the petitioner Commissioner of Internal Revenue (CIR)
Manila seeks to reverse and set aside the 1] September 16, 2008
Decision1 of the Court of Tax Appeals En Banc (CTA-En Banc), in
SECOND DIVISION C.T.A. EB No. 306 and 2] its November 18, 2008
Resolution2 denying petitioner’s motion for reconsideration.
G.R. No. 185371               December 8, 2010
The CTA-En Banc affirmed in toto the decision of its Second
Division (CTA-Second Division) in CTA Case No. 7169 reversing the
COMMISSIONER OF INTERNAL REVENUE, Petitioner, February 8, 2005 Decision of the CIR which assessed respondent
vs. Metro Star Superama, Inc. (Metro Star) of deficiency value-added tax
METRO STAR SUPERAMA, INC., Respondent. and withholding tax for the taxable year 1999.

DECISION Based on a Joint Stipulation of Facts and Issues3 of the parties, the
CTA Second Division summarized the factual and procedural
MENDOZA, J.: antecedents of the case, the pertinent portions of which read:
Petitioner is a domestic corporation duly organized and existing by 0
virtue of the laws of the Republic of the Philippines, x x x.
Output Tax ₱ 154,338.08
On January 26, 2001, the Regional Director of Revenue Region No. ___________
10, Legazpi City, issued Letter of Authority No. 00006561 for Less: Input Tax
__
Revenue Officer Daisy G. Justiniana to examine petitioner’s books of
accounts and other accounting records for income tax and other VAT Payable ₱ 154,338.08
internal revenue taxes for the taxable year 1999. Said Letter of
Authority was revalidated on August 10, 2001 by Regional Director ₱
Leonardo Sacamos. Add: 25% Surcharge 38,584.
54
For petitioner’s failure to comply with several requests for the 79,746.
presentation of records and Subpoena Duces Tecum, [the] OIC of 20% Interest
49
BIR Legal Division issued an Indorsement dated September 26,
2001 informing Revenue District Officer of Revenue Region No. 67, Compromise Penalty
Legazpi City to proceed with the investigation based on the best
Late
evidence obtainable preparatory to the issuance of assessment ₱16,000.00
Payment
notice.
Failure to
18,400.
On November 8, 2001, Revenue District Officer Socorro O. Ramos- File VAT 2,400.00 136,731.01
00
Lafuente issued a Preliminary 15-day Letter, which petitioner returns
received on November 9, 2001. The said letter stated that a post
TOTAL ₱ 291,069.09
audit review was held and it was ascertained that there was
deficiency value-added and withholding taxes due from petitioner in WITHHOLDING TAX
the amount of ₱ 292,874.16.
Compensation 2,772.91
On April 11, 2002, petitioner received a Formal Letter of Demand Expanded 110,103.92
dated April 3, 2002 from Revenue District No. 67, Legazpi City,
assessing petitioner the amount of Two Hundred Ninety Two Total Tax Due ₱ 112,876.83
Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos
(₱292,874.16.) for deficiency value-added and withholding taxes for Less: Tax Withheld 111,848.27
the taxable year 1999, computed as follows: Deficiency Withholding Tax ₱ 1,028.56

ASSESSMENT NOTICE NO. 067-99-003-579-072 Add: 20% Interest p.a. 576.51

Compromise Penalty 200.00
VALUE ADDED TAX TOTAL ₱ 1,805.07

Gross Sales ₱1,697,718.9 *Expande ₱1,949,334. x 5% 97,466.71

 d On July 30, 2004, petitioner filed with the Office of respondent
Withholdi 25 Commissioner a Motion for Reconsideration pursuant to Section
ng Tax 3.1.5 of Revenue Regulations No. 12-99.

Film On February 8, 2005, respondent Commissioner, through its

10,000.25 x 10% 1,000.00
Rental authorized representative, Revenue Regional Director of Revenue
Audit Fee 193,261.20 x 5% 9,663.00 Region 10, Legaspi City, issued a Decision denying petitioner’s
Motion for Reconsideration. Petitioner, through counsel received said
Rental Decision on February 18, 2005.
41,272.73 x 1% 412.73
Expense
x x x.
Security
156,142.01 x 1% 1,561.42
Service
Denying that it received a Preliminary Assessment Notice (PAN) and
Service Contractor ₱ 110,103.92 claiming that it was not accorded due process, Metro Star filed a
petition for review4 with the CTA. The parties then stipulated on the
Total following issues to be decided by the tax court:
SUMMARIES OF DEFICIENCIES
1. Whether the respondent complied with the due process
VALUE ADDED TAX ₱ 291,069.09 requirement as provided under the National Internal
WITHHOLDING TAX 1,805.07 Revenue Code and Revenue Regulations No. 12-99 with
regard to the issuance of a deficiency tax assessment;
TOTAL ₱ 292,874.16
1.1 Whether petitioner is liable for the respective
Subsequently, Revenue District Office No. 67 sent a copy of the amounts of ₱291,069.09 and ₱1,805.07 as
Final Notice of Seizure dated May 12, 2003, which petitioner deficiency VAT and withholding tax for the year
received on May 15, 2003, giving the latter last opportunity to settle 1999;
its deficiency tax liabilities within ten (10) [days] from receipt thereof,
otherwise respondent BIR shall be constrained to serve and execute 1.2. Whether the assessment has become final and
the Warrants of Distraint and/or Levy and Garnishment to enforce executory and demandable for failure of petitioner to
collection. protest the same within 30 days from its receipt
thereof on April 11, 2002, pursuant to Section 228 of
On February 6, 2004, petitioner received from Revenue District the National Internal Revenue Code;
Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23
dated May 12, 2003 demanding payment of deficiency value-added 2. Whether the deficiency assessments issued by the
tax and withholding tax payment in the amount of ₱292,874.16. respondent are void for failure to state the law and/or facts
upon which they are based.
 2.2 Whether petitioner was informed of the law and Aggrieved, the CIR filed a petition for review9 with the CTA-En Banc,
facts on which the assessment is made in but the petition was dismissed after a determination that no new
compliance with Section 228 of the National Internal matters were raised. The CTA-En Banc disposed:
Revenue Code;
WHEREFORE, the instant Petition for Review is hereby DENIED
3. Whether or not petitioner, as owner/operator of a DUE COURSE and DISMISSED for lack of merit. Accordingly, the
movie/cinema house, is subject to VAT on sales of services March 21, 2007 Decision and July 27, 2007 Resolution of the CTA
under Section 108(A) of the National Internal Revenue Second Division in CTA Case No. 7169 entitled, "Metro Star
Code; Superama, Inc., petitioner vs. Commissioner of Internal Revenue,
respondent" are hereby AFFIRMED in toto.
4. Whether or not the assessment is based on the best
evidence obtainable pursuant to Section 6(b) of the National SO ORDERED.
Internal Revenue Code.
The motion for reconsideration10 filed by the CIR was likewise denied
The CTA-Second Division found merit in the petition of Metro Star by the CTA-En Banc in its November 18, 2008 Resolution.11
and, on March 21, 2007, rendered a decision, the decretal portion of
which reads: The CIR, insisting that Metro Star received the PAN, dated January
16, 2002, and that due process was served nonetheless because the
WHEREFORE, premises considered, the Petition for Review is latter received the Final Assessment Notice (FAN), comes now
hereby GRANTED. Accordingly, the assailed Decision dated before this Court with the sole issue of whether or not Metro Star
February 8, 2005 is hereby REVERSED and SET ASIDE and was denied due process.
respondent is ORDERED TO DESIST from collecting the subject
taxes against petitioner. The general rule is that the Court will not lightly set aside the
conclusions reached by the CTA which, by the very nature of its
The CTA-Second Division opined that "[w]hile there [is] a disputable functions, has accordingly developed an exclusive expertise on the
presumption that a mailed letter [is] deemed received by the resolution unless there has been an abuse or improvident exercise of
addressee in the ordinary course of mail, a direct denial of the authority.12 In Barcelon, Roxas Securities, Inc. (now known as UBP
receipt of mail shifts the burden upon the party favored by the Securities, Inc.) v. Commissioner of Internal Revenue,13 the Court
presumption to prove that the mailed letter was indeed received by wrote:
the addressee."5 It also found that there was no clear showing that
Metro Star actually received the alleged PAN, dated January 16, Jurisprudence has consistently shown that this Court accords the
2002. It, accordingly, ruled that the Formal Letter of Demand dated findings of fact by the CTA with the highest respect. In Sea-Land
April 3, 2002, as well as the Warrant of Distraint and/or Levy dated Service Inc. v. Court of Appeals  [G.R. No. 122605, 30 April 2001,
May 12, 2003 were void, as Metro Star was denied due process.6 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax
Appeals, which by the very nature of its function is dedicated
The CIR sought reconsideration7 of the decision of the CTA-Second exclusively to the consideration of tax problems, has necessarily
Division, but the motion was denied in the latter’s July 24, 2007 developed an expertise on the subject, and its conclusions will not be
Resolution.8 overturned unless there has been an abuse or improvident exercise
of authority. Such findings can only be disturbed on appeal if they
are not supported by substantial evidence or there is a showing of document which is executed with the intervention of the Bureau of
gross error or abuse on the part of the Tax Court. In the absence of Posts. This Court does not put much credence to the self serving
any clear and convincing proof to the contrary, this Court must documentations made by the BIR personnel especially if they are
presume that the CTA rendered a decision which is valid in every unsupported by substantial evidence establishing the fact of mailing.
respect. Thus:

On the matter of service of a tax assessment, a further perusal of our "While we have held that an assessment is made when sent within
ruling in Barcelon is instructive, viz: the prescribed period, even if received by the taxpayer after its
expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May
Jurisprudence is replete with cases holding that if the taxpayer 27, 1959), this ruling makes it the more imperative that the release,
denies ever having received an assessment from the BIR, it is mailing or sending of the notice be clearly and satisfactorily proved.
incumbent upon the latter to prove by competent evidence that such Mere notations made without the taxpayer’s intervention, notice or
notice was indeed received by the addressee. The onus probandi control, without adequate supporting evidence cannot suffice;
was shifted to respondent to prove by contrary evidence that the otherwise, the taxpayer would be at the mercy of the revenue offices,
Petitioner received the assessment in the due course of mail. The without adequate protection or defense." (Nava vs. CIR, 13 SCRA
Supreme Court has consistently held that while a mailed letter is 104, January 30, 1965).
deemed received by the addressee in the course of mail, this is
merely a disputable presumption subject to controversion and a x x x.
direct denial thereof shifts the burden to the party favored by the
presumption to prove that the mailed letter was indeed received by The failure of the respondent to prove receipt of the assessment by
the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus the Petitioner leads to the conclusion that no assessment was
as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner issued. Consequently, the government’s right to issue an
of Internal Revenue, 13 SCRA 104, January 30, 1965: assessment for the said period has already prescribed. (Industrial
Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885,
"The facts to be proved to raise this presumption are (a) that the August 22, 1996). (Emphases supplied.)
letter was properly addressed with postage prepaid, and (b) that it
was mailed. Once these facts are proved, the presumption is that the The Court agrees with the CTA that the CIR failed to discharge its
letter was received by the addressee as soon as it could have been duty and present any evidence to show that Metro Star indeed
transmitted to him in the ordinary course of the mail. But if one of the received the PAN dated January 16, 2002. It could have simply
said facts fails to appear, the presumption does not lie. (VI, Moran, presented the registry receipt or the certification from the postmaster
Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. that it mailed the PAN, but failed. Neither did it offer any explanation
Sunlife Assurance of Canada, 41 Phil 269)." on why it failed to comply with the requirement of service of the PAN.
It merely accepted the letter of Metro Star’s chairman dated April 29,
x x x. What is essential to prove the fact of mailing is the registry 2002, that stated that he had received the FAN dated April 3, 2002,
receipt issued by the Bureau of Posts or the Registry return card but not the PAN; that he was willing to pay the tax as computed by
which would have been signed by the Petitioner or its authorized the CIR; and that he just wanted to clarify some matters with the
representative. And if said documents cannot be located, hope of lessening its tax liability.
Respondent at the very least, should have submitted to the Court a
certification issued by the Bureau of Posts and any other pertinent
This now leads to the question: Is the failure to strictly comply with The taxpayers shall be informed in writing of the law and the facts on
notice requirements prescribed under Section 228 of the National which the assessment is made; otherwise, the assessment shall be
Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. void.
12-99 tantamount to a denial of due process? Specifically, are the
requirements of due process satisfied if only the FAN stating the Within a period to be prescribed by implementing rules and
computation of tax liabilities and a demand to pay within the regulations, the taxpayer shall be required to respond to said notice.
prescribed period was sent to the taxpayer? If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
The answer to these questions require an examination of Section findings.
228 of the Tax Code which reads:
Such assessment may be protested administratively by filing a
SEC. 228. Protesting of Assessment. - When the Commissioner or request for reconsideration or reinvestigation within thirty (30) days
his duly authorized representative finds that proper taxes should be from receipt of the assessment in such form and manner as may be
assessed, he shall first notify the taxpayer of his findings: provided, prescribed by implementing rules and regulations. Within sixty (60)
however, that a preassessment notice shall not be required in the days from filing of the protest, all relevant supporting documents
following cases: shall have been submitted; otherwise, the assessment shall become
final.
(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as If the protest is denied in whole or in part, or is not acted upon within
appearing on the face of the return; or one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal
(b) When a discrepancy has been determined between the to the Court of Tax Appeals within thirty (30) days from receipt of the
tax withheld and the amount actually remitted by the said decision, or from the lapse of one hundred eighty (180)-day
withholding agent; or period; otherwise, the decision shall become final, executory and
demandable. (Emphasis supplied).
(c) When a taxpayer who opted to claim a refund or tax
credit of excess creditable withholding tax for a taxable Indeed, Section 228 of the Tax Code clearly requires that the
period was determined to have carried over and taxpayer must first be informed that he is liable for deficiency taxes
automatically applied the same amount claimed against the through the sending of a PAN. He must be informed of the facts and
estimated tax liabilities for the taxable quarter or quarters of the law upon which the assessment is made. The law imposes a
the succeeding taxable year; or substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid
assessment is evidently violative of the cardinal principle in
(d) When the excise tax due on exciseable articles has not
administrative investigations - that taxpayers should be able to
been paid; or
present their case and adduce supporting evidence.14
(e) When the article locally purchased or imported by an
This is confirmed under the provisions R.R. No. 12-99 of the BIR
exempt person, such as, but not limited to, vehicles, capital
which pertinently provide:
equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons.
SECTION 3. Due Process Requirement in the Issuance of a the law, rules and regulations, or jurisprudence on which the
Deficiency Tax Assessment. — proposed assessment is based (see illustration in ANNEX A
hereof). If the taxpayer fails to respond within fifteen (15)
3.1 Mode of procedures in the issuance of a deficiency tax days from date of receipt of the PAN, he shall be considered
assessment: in default, in which case, a formal letter of demand and
assessment notice shall be caused to be issued by the said
Office, calling for payment of the taxpayer's deficiency tax
3.1.1 Notice for informal conference. — The Revenue Officer
liability, inclusive of the applicable penalties.
who audited the taxpayer's records shall, among others,
state in his report whether or not the taxpayer agrees with
his findings that the taxpayer is liable for deficiency tax or 3.1.3 Exceptions to Prior Notice of the Assessment. — The
taxes. If the taxpayer is not amenable, based on the said notice for informal conference and the preliminary
Officer's submitted report of investigation, the taxpayer shall assessment notice shall not be required in any of the
be informed, in writing, by the Revenue District Office or by following cases, in which case, issuance of the formal
the Special Investigation Division, as the case may be (in the assessment notice for the payment of the taxpayer's
case Revenue Regional Offices) or by the Chief of Division deficiency tax liability shall be sufficient:
concerned (in the case of the BIR National Office) of the
discrepancy or discrepancies in the taxpayer's payment of (i) When the finding for any deficiency tax is the
his internal revenue taxes, for the purpose of "Informal result of mathematical error in the computation of the
Conference," in order to afford the taxpayer with an tax appearing on the face of the tax return filed by
opportunity to present his side of the case. If the taxpayer the taxpayer; or
fails to respond within fifteen (15) days from date of receipt
of the notice for informal conference, he shall be considered (ii) When a discrepancy has been determined
in default, in which case, the Revenue District Officer or the between the tax withheld and the amount actually
Chief of the Special Investigation Division of the Revenue remitted by the withholding agent; or
Regional Office, or the Chief of Division in the National
Office, as the case may be, shall endorse the case with the (iii) When a taxpayer who opted to claim a refund or
least possible delay to the Assessment Division of the tax credit of excess creditable withholding tax for a
Revenue Regional Office or to the Commissioner or his duly taxable period was determined to have carried over
authorized representative, as the case may be, for and automatically applied the same amount claimed
appropriate review and issuance of a deficiency tax against the estimated tax liabilities for the taxable
assessment, if warranted. quarter or quarters of the succeeding taxable year;
or
3.1.2 Preliminary Assessment Notice (PAN). — If after
review and evaluation by the Assessment Division or by the (iv) When the excise tax due on excisable articles
Commissioner or his duly authorized representative, as the has not been paid; or
case may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or taxes,
the said Office shall issue to the taxpayer, at least by (v) When an article locally purchased or imported by
registered mail, a Preliminary Assessment Notice (PAN) for an exempt person, such as, but not limited to,
the proposed assessment, showing in detail, the facts and vehicles, capital equipment, machineries and spare
 parts, has been sold, traded or transferred to non- The case of CIR v. Menguito16 cited by the CIR in support of its
exempt persons. argument that only the non-service of the FAN is fatal to the validity
of an assessment, cannot apply to this case because the issue
3.1.4 Formal Letter of Demand and Assessment Notice. — therein was the non-compliance with the provisions of R. R. No. 12-
The formal letter of demand and assessment notice shall be 85 which sought to interpret Section 229 of the old tax law. RA No.
issued by the Commissioner or his duly authorized 8424 has already amended the provision of Section 229 on
representative. The letter of demand calling for payment of protesting an assessment. The old requirement of
the taxpayer's deficiency tax or taxes shall state the facts, merely notifying the taxpayer of the CIR’s findings was changed in
the law, rules and regulations, or jurisprudence on which the 1998 to informing the taxpayer of not only the law, but also of the
assessment is based, otherwise, the formal letter of demand facts on which an assessment would be made. Otherwise, the
and assessment notice shall be void (see illustration in assessment itself would be invalid.17 The regulation then, on the
ANNEX B hereof). other hand, simply provided that a notice be sent to the respondent
in the form prescribed, and that no consequence would ensue for
failure to comply with that form.
The same shall be sent to the taxpayer only by registered mail or by 1avvphi1

personal delivery.
The Court need not belabor to discuss the matter of Metro Star’s
failure to file its protest, for it is well-settled that a void assessment
If sent by personal delivery, the taxpayer or his duly authorized
bears no fruit.18
representative shall acknowledge receipt thereof in the duplicate
copy of the letter of demand, showing the following: (a) His name; (b)
signature; (c) designation and authority to act for and in behalf of the It is an elementary rule enshrined in the 1987 Constitution that no
taxpayer, if acknowledged received by a person other than the person shall be deprived of property without due process of law.19 In
taxpayer himself; and (d) date of receipt thereof. balancing the scales between the power of the State to tax and its
inherent right to prosecute perceived transgressors of the law on one
side, and the constitutional rights of a citizen to due process of law
x x x.
and the equal protection of the laws on the other, the scales must tilt
in favor of the individual, for a citizen’s right is amply protected by the
From the provision quoted above, it is clear that the sending of a Bill of Rights under the Constitution. Thus, while "taxes are the
PAN to taxpayer to inform him of the assessment made is but part of lifeblood of the government," the power to tax has its limits, in spite
the "due process requirement in the issuance of a deficiency tax of all its plenitude. Hence in Commissioner of Internal Revenue v.
assessment," the absence of which renders nugatory any Algue, Inc.,20 it was said –
assessment made by the tax authorities. The use of the word "shall"
in subsection 3.1.2 describes the mandatory nature of the service of
Taxes are the lifeblood of the government and so should be collected
a PAN. The persuasiveness of the right to due process reaches both
without unnecessary hindrance. On the other hand, such collection
substantial and procedural rights and the failure of the CIR to strictly
should be made in accordance with law as any arbitrariness will
comply with the requirements laid down by law and its own rules is a
negate the very reason for government itself. It is therefore
denial of Metro Star’s right to due process.15 Thus, for its failure to
necessary to reconcile the apparently conflicting interests of the
send the PAN stating the facts and the law on which the assessment
authorities and the taxpayers so that the real purpose of taxation,
was made as required by Section 228 of R.A. No. 8424, the
which is the promotion of the common good, may be achieved.
assessment made by the CIR is void.
 x x x           x x x          x x x But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
It is said that taxes are what we pay for civilized society. Without exercised reasonably and in accordance with the prescribed
taxes, the government would be paralyzed for the lack of the motive procedure. If it is not, then the taxpayer has a right to complain and
power to activate and operate it. Hence, despite the natural the courts will then come to his succor. For all the awesome power of
reluctance to surrender part of one’s hard-earned income to taxing the tax collector, he may still be stopped in his tracks if the taxpayer
authorities, every person who is able to must contribute his share in can demonstrate x x x that the law has not been
the running of the government. The government for its part is observed.21 (Emphasis supplied).
expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral WHEREFORE, the petition is DENIED.
and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary SO ORDERED.
method of exaction by those in the seat of power.

THIRD DIVISION This Petition for Review on Certiorari  seeks to nullify and set aside
1

the June 7, 2016 Decision  and September 26, 2016 Resolution  of
2 3

November 22, 2017 the Court of Tax Appeals En Banc in CTA EB No. 1251. The Court of
Tax Appeals En Banc affirmed its First Division's September 1, 2014
Decision,  cancelling the deficiency assessments against Transitions
4

G.R. No. 227544

Optical Philippines, Inc. (Transitions Optical).
COMMISSIONER OF INTERNAL REVENUE, Petitioner
On April 28, 2006, Transitions Optical received Letter of Authority
vs.
No. 00098746 dated March 23, 2006 from Revenue Region No. 9,
TRANSITIONS OPTICAL PHILIPPINES, INC., Respondent
San Pablo City, of the Bureau of Internal Revenue. It was signed by
then Officer-in-Charge- Regional Director Corazon C. Pangcog and it
DECISION authorized Revenue Officers Jocelyn Santos and Levi Visaya to
examine Transition Optical's books of accounts for internal revenue
LEONEN, J.: tax purposes for taxable year 2004. 5

Estoppel applies against a taxpayer who did not only raise at the On October 9, 2007, the parties allegedly executed a Waiver of the
earliest opportunity its representative's lack of authority to execute Defense of Prescription (First Waiver).  In this supposed First Waiver,
6

two (2) waivers of defense of prescription, but was also accorded, the prescriptive period for the assessment of Transition Optical's
through these waivers, more time to comply with the audit internal revenue taxes for the year 2004 was extended to June 20,
requirements of the Bureau of Internal Revenue. Nonetheless, a tax 2008.  The document was signed by Transitions Optical's Finance
7

assessment served beyond the extended period is void. Manager, Pamela Theresa D. Abad, and by Bureau of Internal
Revenue's Revenue District Officer; Myrna S. Leonida. 8
This was followed by another supposed Waiver of the Defense of
Final Tax on Royalty 14,026,247.90
Prescription (Second Waiver) dated June 2, 2008. This time, the
prescriptive period was supposedly extended to November 30, 2008. 9
Final Tax on Interest Income 1,115,497. 76

Thereafter, the Commissioner of Inte1nal Revenue, through Total ₱19,701,849.68 13

Regional Director Jaime B. Santiago (Director Santiago), issued a

Preliminary Assessment Notice (PAN) dated November 11, 2008,
On March 16, 2012, Transitions Optical filed a Petition for Review
assessing Transitions Optical for its deficiency taxes for taxable year
before the Court of Tax Appeals. 14

2004. Transitions Optical filed a written protest on November 26,

2008.10

In her Answer, the Commissioner of Internal Revenue interposed

that Transitions Optical's claim of prescription was inappropriate
The Commissioner of Internal Revenue, again through Director
because the executed Waiver of the Defense of Prescription
Santiago, subsequently issued against Transitions Optical a Final
extended the assessment period. She added that the posting of the
Assessment Notice (FAN) and a Formal Letter of Demand (FLD)
FAN and FLD was within San Pablo City Post Office's exclusive
dated November 28, 2008 for deficiency income tax, value-added
control. She averred that she could not be faulted if the FAN and
tax, expanded withholding tax, and final tax for taxable year 2004
FLD were posted for mailing only on December 2, 20081 since
amounting to ₱l 9, 701,849.68. 11

November 28, 2008 fell on a Friday and the next supposed working
day, December 1, 2008, was declared a Special Holiday. 15

In its Protest Letter dated December 8, 2008 against the FAN,

Transitions Optical alleged that the demand for deficiency taxes had
After trial and upon submission of the parties' memoranda, the First
already prescribed at the time the FAN was mailed on December 2,
Division of the Court of Tax Appeals (First Division) rendered a
2008. In its Supplemental Protest, Transitions Optical pointed out
Decision on September 1, 2014.  It held:
16

that the FAN was void because the FAN indicated 2006 as the return
period, but the assessment covered calendar year 2004. 12

In summary therefore, the Court hereby finds the subject Waivers to

be defective and therefore void. Nevertheless, granting for the sake
Years later, the Commissioner of Internal Revenue, through
of argument that the subject Waivers were validly executed, for
Regional Director Jose N. Tan, issued a Final Decision on the
failure of respondent however to present adequate supporting
Disputed Assessment dated January 24, 2012, holding Transitions
evidence to prove that it issued the FAN and the FLD within the
Optical liable for deficiency taxes in the total amount of
extended period agreed upon in the 2nd Waiver, the subject
₱l9,701,849.68 for taxable year 2004, broken down as follows;
assessment must be cancelled for being issued beyond the
prescriptive period provided by law to assess.
Tax Amount

Income Tax ₱3,153,371.04

Value-Added Tax 1,231,393.4 7

Expanded Withholding Tax 175,339.51

WHEREFORE, in light of the foregoing considerations, the instant issuance of the notice of assessment to the taxpayer or what is
Petition for Review is hereby GRANTED. Accordingly, the Final usually known as PAN, and not the FAN issued in case the taxpayer
Assessment Notice, Formal Letter of Demand and Final Decision on files a protest. 25

Disputed Assessment finding petitioner Transitions Optical

Philippines, Inc. liable for deficiency income tax, deficiency expanded On the other hand, respondent contends that the Court of Tax
withholding tax, deficiency value-added tax and deficiency final tax Appeals properly found the waivers defective, and therefore, void. It
for taxable year 2004 in the total amount of ₱19,701,849.68 are adds that the three (3)-year prescriptive period for tax assessment
hereby CANCELLEU and SET ASIDE. primarily benefits the taxpayer, and any waiver of this period must be
strictly scrutinized in light of the requirements of the laws and
SO ORDER.ED.  (Emphasis in the original)
17
rules.  Respondent posits that the requirements for valid waivers are
26

not mere technical rules of procedure that can be set aside. 27

The Commissioner of Internal Revenue filed a Motion for

Reconsideration, which was denied by the First Division in its Respondent further asserts that it is not estopped from questioning
Resolution  dated November 7, 2014.
18
the validity of the waivers as it raised its objections at the earliest
opportunity.  Besides, the duty to ensure compliance with the
28

The Court of Tax Appeals En Banc affirmed the First Division requirements of RMO No. 20-90 and RDAO No. 05-01, including
Decision  and subsequently denied the Commissioner of Internal
19 proper authorization of the taxpayer's representative, fell primarily on
Revenue's Motion for Reconsideration. 20 petitioner and her revenue officers. Thus, petitioner came to court
with unclean hands and cannot be permitted to invoke the doctrine of
estoppel.  Respondent insists that there was no clear showing that
29

Hence, this Petition was filed before this Court. Transitions Optical
the signatories in the waivers were duly sanctioned to act on its
filed its Comment. 21

behalf. 30

Petitioner contends that "[t]he two Waivers executed by the parties

Even assuming that the waivers were valid, respondent argues that
on October 9, 2007 and June 2, 2008 substantially complied with the
the assessment would still be void as the FAN was served only on
requirements of Sections 203 and 222 of the [National Internal
December 4, 2008, beyond the extended period of November 30,
Revenue Code]."  She adds that technical rules of procedure of
22

2008.  Contrary to petitioner's stance, respondent counters that the

31

administrative bodies, such as those provided in Revenue

assessment required to be served within the three (3)-year
Memorandum Order (RMO) No. 20-90 issued on April 4, 1990 and
prescriptive period is the FAN and FLD, not just the PAN.  According
32

Revenue Delegation Authority Order (RDAO) No. 05-01 issued on

to respondent, ''it is the FAN and FLD that formally notifly] the
August 2, 2001, must be liberally applied to promote justice.  At any
23

taxpayer, and categorica1ly [demand] from him, that a deficiency tax

rate, petitioner maintains that respondent is estopped from
is due." 33

questioning the validity of the waivers since their execution was

caused by the delay occasioned by respondent's own failure to
comply with the orders of the Bureau of Internal Revenue to submit The issues for this Court's resolution are:
documents for audit and examination. 24

First, whether or not the two (2) Waivers of the Defense of

Furthermore, petitioner argues that the assessment required to be Prescription entered into by the parties on October 9, 2007 and June
issued within the three (3)-year period provided in Sections 203 and 2, 2008 were valid; and
222 of the National Internal Revenue Code refer to petitioner's actual
Second, whether or not the assessment of deficiency taxes against ....
respondent Transitions Optical Philippines, Inc. for taxable year 2004
had prescribed. (d) Any internal revenue tax, which has been assessed within the
period agreed upon as provided in paragraph (b) hereinabove, may
This Court denies the Petition. The Court of Tax Appeals committed be collected by distraint or levy or by a proceeding in court within the
no reversible error in cancelling the deficiency tax assessments. period agreed upon in writing before the expiration of the five (5) -
year period. The period so agreed upon may be extended by
I subsequent written agreements made before the expiration of the
period previously agreed upon.
As a general rule, petitioner has three (3) years to assess taxpayers
from the filing of the return. Section 203 of the National Internal Thus, the period to assess and collect taxes may be extended upon
Revenue Code provides: the Commissioner of Internal Revenue and the taxpayer's written
agreement, executed before the expiration of the three (3)-year
period.
Section 203. Period of Limitation Upon Assessment m1d Collection. -
Except as provided in Section 222, internal revenue taxes shall be
assessed within three (3) years after the last day prescribed by law In this case, two (2) waivers were supposedly executed by the
for the filing of the return, and no proceeding in court without parties extending the prescriptive periods for assessment of income
assessment for the collection of such taxes shall be begun after the tax, value-added tax, and expanded and final withholding taxes to
expiration of such period: Provided, That in a case where a return is June 20, 2008, and then to November 30, 2008.
filed beyond the period prescribed by law, the three (3)-year period
shall be counted from the day the return was filed. For purposes of The Court of Tax Appeals, both its First Division and En Banc,
this Section, a return filed before the last day prescribed by law for declared as defective and void the two (2) Waivers of the Defense of
the filing thereof shall be considered as filed on such last day. Prescription for non-compliance with the requirements for the proper
execution of a waiver as provided in RMO No. 20-90 and RDAO No.
An exception to the rule of prescription is found in Section 222(b) 05-01. Specifically, the Court of Tax Appeals found that these
and (d) of this Code, viz: Waivers were not accompanied by a notarized written authority from
respondent, authorizing the so-called representatives to act on its
behalf. Likewise, neither the Revenue District Office's acceptance
Section 222. Exceptions as to Period of Limitation of Assessment
date nor respondent's receipt of the Bureau of Internal Revenue's
and Collection of Taxes. -
acceptance was indicated in either document. 34

....
However, Presiding Justice Roman G. Del Rosario (Justice Del
Rosario) in his Separate Concurring Opinion  in the Court of Tax
35

(b) If before the expiration of the time prescribed in Section 203 for Appeals June 7, 2016 Decision, found that respondent is estopped
the assessment of the tax. both the Commissioner and the taxpayer from claiming that the waivers were invalid by reason of its own
have agreed in writing to its assessment after such time, the tax may actions, which persuaded the government to postpone the issuance
be assessed within the period agreed upon. The period so agreed of the assessment. He discussed:
upon may be extended by subsequent written agreement made
before the expiration of the period previously agreed upon.
In the case at bar, respondent performed acts that induced the BIR payment of taxes, as well as contest and negotiate the assessment
to defer the issuance of the assessment. Records reveal that to against it. Yet, after enjoying these benefits, respondent challenged
extend the BIR's prescriptive period to assess respondent for the validity of the Waivers when the consequences thereof were not
deficiency taxes for taxable year 2004, respondent executed two (2) in its favor. In other words, respondent's act of impugning these
waivers. The first Waiver dated October 2007 extended the period to Waivers after benefiting therefrom and allowing petitioner to rely on
assess until June 20, 2008, while the second Waiver, which was the same is an act of bad faith.38

executed on June 2, 2008, extended the period to assess the taxes

until November 30, 2008. As a consequence of the issuance of said This Court found the taxpayer estopped from questioning the validity
waivers, petitioner delayed the issuance of the assessment. of its waivers:

Notably, when respondent filed its protest on November 26, 2008 Respondent executed five Waivers and delivered them to petitioner,
against the Preliminary Assessment Notice dated November 11, one after the other. It allowed petitioner to rely on them and did not
2008, it merely argued that it is not liable for the assessed deficiency raise any objection against their validity until petitioner assessed
taxes and did not raise as an issue the invalidity of the waiver and taxes and penalties against it. Moreover, the application of estoppel
the prescription of petitioner's right to assess the deficiency taxes. In is necessary to prevent the undue injury that the government would
its protest dated December 8, 2008 against the FAN, respondent suffer because of the cancellation of petitioner's assessment of
argued that the year being audited in the FAN has already respondent's tax liabilities.  (Emphasis in the original)
39

prescribed at the time such FAN was mailed on December 2, 2008.

Respondent even stated in that protest that it received the letter Parenthetically, this Court stated that when both parties continued to
(referring to the FAN dated November 28, 2008) on December 5, deal with each other in spite of knowing and without rectifying the
2008, which accordingly is five (5) days after the waiver it issued had defects of the waivers, their situation is "dangerous and open to
prescribed. The foregoing narration plainly does not suggest that abuse by unscrupulous taxpayers who intend to escape their
respondent has any objection to its previously executed waivers. By responsibility to pay taxes by mere expedient of hiding behind
the principle of estoppel, respondent should not be allowed to technicalities."
40

question the validity of the waivers.36

Estoppel similarly applies in this case.

In Commissioner of Internal Revenue v. Next Mobile, Inc. (formerly
Nextel Communications Phils., lnc.),  this Comi recognized the
37

doctrine of estoppel and upheld the waivers when both the taxpayer Indeed, the Bureau of Internal Revenue was at fault when it
and the Bureau of Internal Revenue were in part de lie to. The accepted respondent's Waivers despite their non-compliance with
taxpayer's act of impugning its waivers after benefitting from them the requirements of RMO No. 20-90 and RDAO No. 05-01.
was considered an act of bad faith:
Nonetheless, respondent's acts also show its implied admission of
In this case, respondent, after deliberately executing defective the validity of the waivers. First, respondent never raised the
waivers, raised the very same deficiencies it caused to avoid the tax invalidity of the Waivers at the earliest opportunity, either in its
liability determined by the BIR during the extended assessment Protest to the PAN, Protest to the FAN, or Supplemental Protest to
period. It must be remembered that by virtue of these Waivers, the FAN.  It thereby impliedly recognized these Waivers' validity and
41

respondent was given the opportunity to gather and submit its representatives' authority to execute them. Respondent only
documents to substantiate its claims before the [Commissioner of raised the issue of these Waivers' validity in its Petition for Review
Internal Revenue] during investigation. It was able to postpone the filed with the Court of Tax Appeals.  In fact, as pointed out by Justice
42
Del Rosario, respondent's Protest to the FAN clearly recognized the were actually processed by the post office on December 2, 2008,
validity of the Waivers,  when it stated:
43
since December 1, 2008 was declared a Special Holiday.  The
48

testimony of petitioner's witness, Dario A. Consignado, Jr., that he

This has reference to the Final Assessment Notice ("[F]AN") issued brought the mail matter containing the FAN and the FLD to the post
by your office, dated November 28, 2008. The said letter was office on November 28, 2008 was considered self-serving,
received by Transitions Optical Philippines[,] Inc. (TOPI) on uncorroborated by any other evidence. Additionally, the Certification
December 5, 2008, five days after the waiver we issued which was presented by petitioner certifying that the FAN issued to respondent
valid until November 30, 2008 had prescribed.  (Emphasis supplied)
44 was delivered to its Administrative Division for mailing on November
28, 2008 was found insufficient to prove that the actual date of
mailing was November 28, 2008.
Second, respondent does not dispute petitioner's assertion  that
45

respondent repeatedly failed to comply with petitioner's notices,

directing it to submit its books of accounts and related records for This Court finds no clear and convincing reason to overturn these
examination by the Bureau of Internal Revenue. Respondent also factual findings of the Court of Tax Appeals.
1âwphi1

ignored the Bureau of Internal Revenue's request for an Informal

Conference to discuss other "discrepancies" found in the partial Finally, petitioner's contention that the assessment required to be
documents submitted. The Waivers were necessary to give issued within the three (3)-year or extended period provided in
respondent time to fully comply with the Bureau of Internal Revenue Sections 203 and 222 of the National Internal Revenue Code refers
notices for audit examination and to respond to its Informal to the PAN is untenable.
Conference request to discuss the discrepancies.  Thus, having
46

benefitted from the Waivers executed at its instance, respondent is Considering the functions and effects of a PAN vis a vis a FAN, it is
estopped from claiming that they were invalid and that prescription clear that the assessment contemplated in Sections 203 and 222 of
had set in. the National Internal Revenue Code refers to the service of the FAN
upon the taxpayer.
II
A PAN merely informs the taxpayer of the initial findings of the
But, even as respondent is estopped from questioning the validity of Bureau of Internal Revenue.  It contains the proposed assessment,
49

the Waivers, the assessment is nonetheless void because it was and the facts, law, rules, and regulations or jurisprudence on which
served beyond the supposedly extended period. the proposed assessment is based.  It does not contain a demand
50

for payment but usually requires the taxpayer to reply within 15 days
The First Division of the Court of Tax Appeals found that "the date from receipt. Otherwise, the Commissioner of Internal Revenue will
indicated in the envelope/mail matter containing the FAN and the finalize an assessment and issue a FAN.
FLD is December 4, 2008, which is considered as the date of their
mailing."  Since the validity period of the second Waiver is only until
47
The PAN is a part of due process.  It gives both the taxpayer and the
51

November 30, 2008, prescription had already set in at the time the Commissioner of Internal Revenue the opportunity to settle the case
FAN and the FLD were actually mailed on December 4, 2008. at the earliest possible time without the need for the issuance of a
FAN.
For lack of adequate supp01ting evidence, the Court of Tax Appeals
rejected petitioner's claim that the FAN and the FLD were already On the other hand, a FAN contains not only a computation of tax
delivered to the post office for mailing on November 28, 2008 but liabilities but also a demand for payment within a prescribed
period.  As soon as it is served, an obligation arises on the part of
52

the taxpayer concerned to pay the amount assessed and demanded.

It also signals the time when penalties and interests begin to accrue
against the taxpayer. Thus, the National Internal Revenue Code
imposes a 25% penalty, in addition to the tax due, in case the
taxpayer fails to pay the deficiency tax within the time prescribed for
its payment in the notice of assessment.  Likewise, an interest of
53

20% per annum, or such higher rate as may be prescribed by rules

and regulations, is to be collected from the date prescribed for
payment until the amount is fully paid.  Failure to file an
54

administrative protest within 30 days from receipt of the FAN will

render the assessment final, executory, and demandable.

WHEREFORE, the Petition is DENIED. The June 7, 2016 Decision

and September 26, 2016 Resolution of the Court of Tax Appeals En
Banc in CTAEB No. 1251 are AFFIRMED.

SO ORDERED.